India Agriculture Inputs Seeds of Prosperity 26-02-14!15!05

l Equity Research l India | Emerging Companies l
26 February 2014
India agriculture inputs

Seeds of prosperity
Indias food grain yield is among the lowest in the world, yet demand is projected to increase by 57mtpa over the next decade. This increase will far outstrip the incremental supply (8mtpa), if yields remain at current levels. The natural response is to increase yields by boosting agro-inputs, and this should underpin the INR1tn market in fertilizers, micro-irrigation, pesticides and seeds. We see growth and medium-term investment opportunity in pesticides and seeds; and project this market to grow from INR 350bn in 2012 to INR 650bn by 2017 (CAGR 13%). Our on-the-ground checks with 33 agro-input dealers across 7 states indicate that brand and distribution are the key drivers of success for agro-input companies. Our proprietary framework assesses agro-input companies on six key parameters - Rallis and PI Industries emerge as our top picks. We initiate coverage on Kaveri Seed (OP), UPL (OP) and Coromandel International (IL). Click here to get The Scoop, an audiovisual summary of the report.
Ticker RALI IN PI IN KSCL IN UPLL IN CRIN IN Mkt cap hide column-old Price Rating rating (USD mn) (lc) New Old Rec 492.1 156.85 OP - OP 519.1 252.90 OP - OP 567.0 513.00 OP - OP 1,351.2 185.15 OP - OP 939.6 203.85 IL IL PT (lc) New Chg (%) 200.00 325.00 600.00 235.00 215.00 PER (x) PT Up/(Dn) (lc) side (%) FY1E FY2E 200.00 27.5 20.7 16.5 325.00 28.5 19.7 15.3 600.00 17.0 17.3 13.5 235.00 26.9 9.5 8.2 215.00 5.5 13.9 12.2 EV/EBITDA (x) FY1E FY2E 12.1 10.0 11.8 9.4 15.4 11.1 5.9 5.3 9.0 8.3 Div yield (%) FY1E FY2E 1.9 2.4 0.6 0.8 1.2 1.5 1.6 1.6 2.2 2.2
Click here to get The Scoop, an audiovisual summary of the report
India agriculture inputs

Seeds of prosperity
February 2014
Rallis India^ PI Industries^ Kaveri Seed^ UPL^ Coromandel International^
Share prices as of 25 February 2014 Source: Companies, FactSet, Standard Chartered Research estimates
Sumit Choudhary
Sumit.Choudhary@sc.com +91 22 4205 5916
Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2014
INR 157.00 INR 200.00 RALI IN
http://research.standardchartered.com
Equity Research l India agriculture inputs
Contents
Executive summary Yield Only road to food self-sufficiency Agro-inputs: Key beneficiary of reach for yield Pesticides: Domestic tailwind and huge export opportunity Brand and distribution driven market Seeds: Set to accelerate Our framework for evaluating companies Sector valuation Companies Rallis India PI Industries Kaveri Seed UPL Coromandel International Dhanuka Agritech Jain Irrigation Appendix 1: Overview of companies Appendix 2: Hazardous pesticides 3 5 9 13 17 21 24 27
28 37 45 54 64 72 76 80 83
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26 February 2014
Executive summary
Yield: Only way to food self-sufficiency. We expect Indias food grain demand to grow to 293mt by 2022 from 236mt in 2012. At current yields, the incremental production (8mtpa) will be sharply lower vs incremental demand (57mtpa) over this period. Much higher yields vs. history is required to sustain food self-sufficiency. Lower arable land availability could magnify the need for higher yields (refer Fig. 9). Higher use of agro-inputs is therefore key. Figure 1: Food grain consumption and production in India
310,000 290,000 270,000 250,000 230,000 210,000 190,000 170,000 150,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
3
Foodgrains consumption (kt) Foodgrain production with enhanced yields (kt) Foodgrain production at constant yields (kt) Projected benefit from yields
Source: OECD-FAO, Planning Commission, Ministry of Agriculture, Standard Chartered Research
Agro-inputs: Key beneficiary of reach for yield. We estimate Indias overall agroinputs market to be worth c.INR 1tn, comprising fertilizers, micro irrigation, pesticides and seeds. In addition to the need for higher adoption of these inputs given requisite yield increase, rising rural incomes provide a tailwind for the growth of the agro-inputs market. We prefer the non-subsidised segment of this market, viz. pesticides and seeds, given relatively lower exposure to policy and subsidy delay related issues. We expect the pesticides and seeds market to grow at a CAGR of 13% from INR 350bn to INR 650bn over 2012-22. Pesticides: Brand play. Indias pesticide usage levels are lower vs. global peers (refer Fig 20). The domestic pesticides market is estimated at INR 105bn and projected to grow at a CAGR of 9% to INR 180bn by FY18 (refer Fig 21). Exports are a high-growth segment within the pesticides market and this segment is expected to grow at a CAGR of 15% over FY12-20 to USD 5.8bn (refer Fig. 23). As revealed by our on-the-ground survey of over 33 agro-input distributors across seven states, brand strength and distribution push are the key determinants of farmer preferences in the pesticides market. (refer Fig. 26). Seeds: Set to accelerate. Indias seed market is the sixth largest globally yet underpenetrated vs. global peers. We expect the seeds market to grow to INR 230bn by 2017 from INR 110bn in 2012 (refer Fig 30). The seeds industry is attractive given the high barrier to entry and non-linear growth. The introduction of genetically modified seeds for more crops besides just cotton could provide further upside potential, but we have not factored this into our projections.
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Proprietary framework for ranking agro-input companies. Based on the findings from our survey, we rank companies under coverage based on their brand and distribution strengths. We also evaluate the relative attractiveness of the companies based on four other parameters (product diversification, geographic diversification, leverage and working capital) that can provide sustainable long-term advantages to companies. Rallis and PI Industries fare well on our framework and are our top picks. Figure 2: Ranking of companies under our coverage
Rallis Strength of brand Distribution/ farmer engagement Product diversification Geographic diversification Leverage Working capital Overall Rank
Source: Standard Chartered Research Note: * CRIN financials not available separately for non-fertilizer business beyond EBITDA line. Note: ** We have rated UPLs India business only for ranking of exports, leverage/ working capital at global levels
PI 3 2 4 1 3 3 2
Kaveri 2 4 5 4 1 1 3
UPL** 2 4 2 1 4 4 4
Coromandel* 3 2 3 NA NA NA NA
1 1 1 3 2 2 1
While this framework is instrumental in identifying long-term winners, valuation distortions can impact short-term stock preferences. Initiate coverage on five companies. We initiate coverage on five companies: Rallis, UPL, Coromandel International, PI Industries and Kaveri Seed. We also present non-rated notes on Jain Irrigation and Dhanuka Agritech.
26 February 2014
Yield Only road to food self-sufficiency

Given a rising population, better demographics and economic growth, we expect Indias food grain consumption to rise to 293mt from 236mt over the next decade. At current yields, we expect food production to fall materially short of this requirement (incremental production of only 8mtpa vs incremental demand of 57mtpa over the next decade). Yields need to improve much faster than history, especially considering land constraints. Indias food grain demand Food grain consumption is set to increase by 57mtpa over the next decade India has seen her food grain demand grow at a CAGR of 1.8% over the past decade (2002-2012). According to OECD-FAO projections, Indias cereal (wheat, rice and coarse cereals) consumption is expected to move to 266mt by 2022 from 217mt in 2012. According to the Planning Commission, consumption of pulses is likely to grow to c.22mt by FY17 from 19mt in FY13. Overall, we expect food grain demand to grow to 293mt by 2022 from 236mt an incremental 57mtpa at a CAGR of 2.2%. Figure 3: Food grain consumption in India
310,000 290,000 270,000 250,000 230,000 210,000 190,000 170,000 150,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2020 2021 2021 2022 2022
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India foodgrain consumption (kt) CAGR 2.2%
CAGR 1.8%
Source: OECD-FAO, Planning Commission, Ministry of Agriculture, Standard Chartered Research
We believe that higher food grain demand would be driven by multiple factors including: Population growth. Indias population grew at a CAGR of 1.5% over the past decade and we project it to grow at a CAGR of 1.1% going forward. Figure 4: Indias population growth
1,450 1,400 1,350 1,300 1,250 1,200 1,150 1,100 1,050 1,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 CAGR 1.5% CAGR 1.1% India population (mn)
Source: Standard Chartered Research estimates
26 February 2014
Demographic shift. As the bulk of Indias population pyramid continues to shift towards the 15-59 age bracket, there would be higher food grain consumption per capita over time. Figure 5: Proportion of prime age citizens in Indias population
64% 63% 62% 61% 60% 59% 58% 57% 56% 2000 2005 2010 2015 2020
Proportion of population in 15-59 age group
Government initiatives. While we have not explicity forecast growth in food grain demand owing to recent legislations, we believe that the availability of cheaper food grains through national food security programs will push up demand for food grains. Please refer to Food security bill: A costly affair by Anubhuti Sahay for more details on the recently launched national food security program. Supply Yield response needed We believe that given the current yields and recent trends in land availability, meeting the incremental food grain demand would be an uphill task. Against incremental demand of 57mtpa of food grains over the next decade, at current yields, the incremental production will be only 8mtpa. Figure 6: Food grain consumption and production in India
310,000 290,000 270,000 250,000 230,000 210,000 190,000 170,000 150,000 Foodgrains consumption (kt) Foodgrain production with enhanced yields (kt) Foodgrain production at constant yields (kt) Projected benefit from yields
If yields do not improve, food grain supply will fall materially short of the incremental demand
2008
2001
2002
2003
2004
2005
2006
2007
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: OECD-FAO, Planning Commission, Ministry of Agriculture, Standard Chartered Research estimates
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2022
6
There is ample scope for yields to improve
In other words, at current yields, annual food production/capita will shrink to 188kg by 2022 from 207kg currently. This compares to current food grain production per capita of 337kg globally. Figure 7: Food grain production per capita globally
1,200 1,000 Production kg per capita 800 600 400 200 0 US Russia Thailand Brazil China South Indonesia World Africa India 2012 India 2022E* 492 1,135 Foodgrain production kg per capita
458
448 354 291 266 337 207 188
* At current yields. Source: OECD-FAO, World Bank, Standard Chartered Research estimates
While we have assumed land under cultivation according to OECD projections for cereals and have used similar growth in land usage for pulses, the projections of land under cultivation look optimistic compared with patterns witnessed historically. In case we assume total land under food grains to be constant, overall yield for food grains will need to improve to 2.43 t/ha by 2022 from 2.09 t/ha in 2012. Figure 8: Area under food grains
135,000 130,000 125,000 120,000 115,000 110,000 105,000 CAGR 0.01% Area under foodgrains (000 ha) CAGR 0.6%
2008
2001
2002
2003
2004
2005
2006
2007
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: OECD-FAO, Ministry of Agriculture, Standard Chartered Research estimates
Arable land constraints accentuate the need for material yield response
While the above chart points to the optimism built into OECD (and our) agricultural land projections, the trend of falling arable land in India over the past two decades can potentially render maintaining even the current pace of agricultural land addition difficult. Arable land availability in India has been on a downward trend over the past two decades driven by factors such as land being rendered barren owing to nutrient depletion and shift to industrial/urban usage. A reversal of this pattern would need (1)
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2022
agriculture economics to look attractive enough for land to be migrated away from industrial and urban usage and back to agriculture or (2) aggressive rehabilitation of nutrient depleted land. Figure 9: Indias arable land
164 163 162 161 Mn hectares 160 159 158 157 156 155 154 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: World Bank, Standard Chartered Research. Arable land includes land defined by the FAO as land under temporary crops (double-cropped areas are counted once), temporary meadows for mowing or for pasture, land under market or kitchen gardens, and land temporarily fallow. Land abandoned as a result of shifting cultivation is excluded.
India arable land
It is also worthwhile to mention that India already imports over 60% of her vegetable oil demand (11,000kt vs demand of 18,000kt) and the need to bridge the vegetable oil import gap could put further pressure on land available for food grains in the country. Agro-input usage needs to improve to reduce weather-related supply uncertainty Weather volatility demands focus on agro-inputs. Given the high dependence on rainfed irrigation, it is not surprising to find a high correlation between monsoons and food grain production in India. Such high dependence on weather further neccessitates improvement in irrigation facilities and use of agro-inputs to have an adequate buffer in the system against weather-related weakness in production. Figure 10: India monsoons vs. food grain production (1970-2012)
25% 20% 15% 10% 5% 0% -5% -10% -15% -30% Monsoon rain % yoy -20% -10% 0% 10% 20% 30% 40% 50% Foodgrain production % yoy R2 = 72%
Source: OECD-FAO, IMD, Standard Chartered Research
26 February 2014
Agro-inputs: Key beneficiary of reach for yield

We believe yield needs to improve faster than it did in the past decade, especially considering that prospects of additional land coming under agriculture are minimal. Yields in India are lower than for global peers for most crops and increasing agroinput usage is key for enhancing yields. Of the c.INR 1tn agro-inputs market, c.65% is in subsidised segments (fertilizer and micro irrigation) that are saddled with high working capital and delays in subsidy receipts. We prefer the non-subsidised pesticides/seeds markets. The pesticides and seeds markets are estimated to grow to INR 650bn by 2017 from INR 350bn in 2012 at an impressive 13% CAGR. Faster yield response vs. history is required and higher agro-input usage will help achieve this Need for yield. To achieve the projections for food grain production in India as provided in the previous section, overall yields will need to improve to 2.30 t/ha by 2022 from 2.09 t/ha in 2012. As mentioned in the section above, in case land under cultivation does not increase as per OECD-FAO projections, yields would need to improve even further to 2.43 t/ha by 2022. The required rate of improvement in yields in this case would need to be significantly higher than what India has actually achieved over the past decade. Figure 11: India food grain yield
2.5 2.4 2.3 2.2 2.1 t/ha 2.0 1.9 1.8 1.7 1.6 1.5 Yield assuming no incremental land Yield
2014
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
2020
2021
Source: OECD-FAO, PlanningCommission, Ministry of Agriculture, Standard Chartered Research estimates
Ample scope for yields to improve. India has significantly lower yields versus global averages for most crops. While part of this yield differential could be explained by the lower size of farm holdings in India, we believe that there is still significant scope for yields to improve. Figure 12: Comparison of Indian crop productivity
Mt/ ha Rice Corn Soybean Rapeseed Peanut Sugarcane Wheat
Source: Companies, Standard Chartered Research
World 4.2 5.0 2.2 1.9 1.6 74.0 3.0
India 2.3 2.2 0.9 1.1 0.9 67.0 2.8
China 6.6 5.0 1.6 1.9 3.3 69.8 4.7
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A number of factors including better and judicious use of fertilizers, pesticides and speciality nutrients, higher share of irrigated land, farm mechanisation and higher usage of seeds, including hybrid seeds can help in optimising yields. Agro-input market in India has tailwind from rural welfare schemes Agro-input market in India. The overall agro-input market in India is estimated at c. INR 1tn. We have estimated the market for fertilizers, pesticides, seeds and micro irrigation only for the purpose of our analysis. The market is split as follows. Figure 13: Market for pesticides, seeds, micro irrigation, fertilizers
Micro Irrigation market, INR 33 bn Crop protection market - domestic, INR 115 bn Crop protection market - export, INR 121 bn
Fertilizer market, INR 598 bn
Seed market, INR 113 bn
Source: Ministry of Agriculture, FICCI, Assocham, Companies, Standard Chartered Research
Aside from the above inputs, there is relatively small, but fast growing market for agro-inputs such as organic manures and plant growth nutrients in India, too. Rising rural incomes to provide support. There has been a significant increase in minimum support prices in recent years, boosting farmer incomes. In addition, the government has increased its budget on rural welfare schemes manifold over the past decade, boosting rural incomes. Figure 14: Trend in MSPs for major crops in India
4,500 4,000 3,500 INR per MT 3,000 2,500 2,000 1,500 1,000 500 0 FY08 FY13 FY08 FY13 FY08 FY13 FY08 FY13 FY08 FY13
Source: Ministry of Agriculture, Standard Chartered Research
Paddy
Wheat
Maize
Pulses (arhar)
Cotton
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Figure 15: Trend in the governments rural welfare scheme expenditure

450 400 350 INR bn 300 250 200 150 100 50 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Source: India Budget, Standard Chartered Research
Rural development - total disbursement
CAGR 17%
Subsidy delays and policy exposure makes fertilisers and micro-irrigation less attractive
Subsidised markets Fertilizers and micro-irrigation Fertilizers and micro-irrigation markets have traditionally been subsidised in India owing to the need to promote higher usage and affordability among farmers. Subsidies usually are a help in increasing demand; however, given the poor state of government finances and inefficient processes, this has been a headwind rather than a tailwind for the Indian agro-inputs sector. We also note that India features poorly in our global sustanability report for agriculture, predominantly owing to increases in subsidy levels. Refer Measuring sustainable development by John Calverley. Fertilizers. While fertilizers is the biggest segment of the farm inputs market, the segment is saddled with issues of high subsidies and is often hostage to the governments policy decisions. The urea (N) market is the largest in terms of tonnag e at 30mt, followed by phosphatic (DAP) fertilizers at 9mt and complex fertilizers at 7.3mt. Urea players are subsidised on the basis of a fixed RoE on their regulated capital employed and retail prices are regulated by the government. Phosphatic and potassium players are remunerated on a nutrient-based subsidy (NBS) and the government periodically fixes the amount of subsidy for such fertilizers with the manufacturers being free to price their products in the market. Owing to delays in subsidy payments from the government, most fertilizer companies have been struggling with high working capital requirements of late, curtailing their return ratios. Average subsidy receivable days for the Indian fertilizer industry have increased to over 110 days in FY13 from c. 50 days in FY08. Figure 16: Average subsidy receivable days Indian fertilizer industry
120 110 100 90 80 70 60 50 40 FY07 FY08 FY09 FY10 FY11 FY12 FY13
* For Chambal Fertilizers, Coromandel International, Rashtriya Chemical Fertilizers Source: Company, Standard Chartered Research
Average subsidy days receivables*
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Micro-irrigation (MIS). Micro-irrigation refers to the drip irrigation and sprinkler irrigation markets. Jain Irrigation is the largest domestic company in the micro irrigation segment and estimates the total micro-irrigation market to be worth INR 33bn with 5mn ha under coverage. According to the company, 17mn ha can be brought under micro irrigation by 2017. While the potential for the MIS market in India seems big, one concern for the micro irrigation industry is the high level of subsidies provided by the government (between 50-70%). Like in the case of fertilizers, subsidy payments are usually delayed, resulting in bloated balance sheets for most players. Pesticides and seeds are our preferred plays on agro-inputs space Non-subsidised markets Our preferred play Owing to issues related to process inefficiencies and risk of delays in subsidy payments or changes in government policies, we prefer playing the agro-input theme through non-subsidised segments such as pesticides, seeds and other nutrients. The combined size of the Indian pesticides and seeds market is estimated to grow to INR 650bn by 2017 from INR 350bn in 2012 a CAGR of 13%. According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the domestic pesticides market is estimated to grow at a CAGR of 9% over FY13-18 and pesticides export market is estimated to grow at a CAGR of 15% up to FY20. We estimate the seed market to grow at a CAGR of 15% over 2012-17 in line with projections from Assocham. Figure 17: Indian pesticides and seeds market size
700 600 500 INR bn 400 300 200 100 0 2008 2009 2010 2011 2012 2017E
Source: FICCI, Assocham, Standard Chartered Research estimates
Domestic pesticides market Pesticides export market Seeds market CAGR 13%
CAGR 17%
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Pesticides: Domestic tailwind and huge export opportunity

Around 85% of Indias crop losses are due to causes that can be controlled by pesticides (INR 1.2tn of avoidable crop losses annually). Pesticide penetration is low in India (0.6kg/ha) vs. global peers (5-17 kg/ha). The domestic pesticides market is expected to grow at a CAGR of 9% p.a. to INR 180bn by FY18. Rallis and UPL are the prominent domestic players. Pesticide exports are projected to grow faster at 15% p.a. to USD 5.8bn by FY20. PI and Rallis are best positioned to tap the export opportunity. Direct impact on yields. According to estimates from Crop Care Federation of India (CCFI), 85% of annual crop losses are due to pest infestation, diseases and weeds. Total annual losses owing to these factors is estimated at INR 1.2tn. Total crop losses across key crops such as rice, cotton and sugarcane are estimated to be in the region of 20-30%. Figure 18: Avoidable crop losses by cause
Rodents & Others, 15% Weeds, 33% % crop loss
Figure 19: Avoidable crop losses by key crop

35% 30% 25% 20% 15% 10% 5% INR 280bn 30% INR 300bn 30% INR 99bn 20% INR 44bn 20% INR 42bn 20%
Diseases, 26%
Insects, 26%
Source: CCFI, Standard Chartered Research
0% Rice Cotton Sugarcane Potato Soybean

Source: CCFI, Standard Chartered Research
Low penetration of pesticides in the country. We estimate Indias domestic pesticides market at INR 105bn for FY12. The country has a very low pesticides use per acre of arable land as can be seen from the following chart. Figure 20: Pesticides/ha of arable land
18 16 14 12 kg/ha 10 8 6 4 2 0 Taiwan China Japan USA Korea France UK India
Source: FICCI, Standard Chartered Research
17
13
12
7 5 5
0.6
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Low penetration levels offer growth opportunities for the domestic pesticides market
In view of the above, it is not surprising that the domestic pesticides market is projected by FICCI to grow at a CAGR of 9%. Figure 21: Domestic crop protection market growth
200,000 180,000 160,000 140,000 Domestic crop protection market size
INR mn
120,000 100,000 80,000 60,000 40,000 20,000 0 FY08 FY09 FY10 FY11 FY12 FY18E
Predominantly generic market. While globally there are players like Syngenta, Bayer and BASF who invest significant capital in development of new molecules providing them with a competitive edge, Indian companies in the pesticides space are largely generic players. Most players in India either in-license off-patent molecules from innovators globally or they develop their own generics to compete with other brands in the market. There are a few exceptions where companies co-market or inlicense innovative molecules through arrangements with large global players. The structure of crop protection industry is as follows: Figure 22: Crop protection value chain
Technical (bulk) producers (~125)
Players: PI, Rallis, Dhanuka, UPL, Coromandel
Formulators (~800)
Players: Bayer, Syngenta, PI, Rallis, Dhanuka, UPL, Coromandel
Distributors (~145000)
Predominantly unorganised players Predominantly unorganised, Coromandel has a presence through Manna Gromor Centres
Retailers
End users
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Pesticides exports, especially custom manufacturing offers strong growth potential
Exports High growth opportunity. We believe that Indian companies have a strong potential to grow their exports for crop protection products. Pesticide exports by Indian companies are estimated to be c.USD 2bn. According to FICCI, the export market is projected to increase at a CAGR of 15% to reach USD 5.8bn by FY20. We estimate the pesticides export market to double to INR 247bn by 2017 from INR 121bn in 2012. Figure 23: Pesticides exports from India
300 250 200 INR bn 150 100 50 0 2008 2009 2010 2011 2012 2017E
Indian players competitive advantages in the export market include low-cost manufacturing and availability of trained manpower and capacities for production. The major export markets for Indian companies are the US, Europe and Asia (predominantly Japan). In addition to exporting generic pesticides to international markets, Indian companies are also tying up with global pesticide manufacturers for contract manufacturing of technical compounds. Industry sources believe that the contract manufacturing space could grow substantially in the future owing to increased interest from Japanese players (driven by a desire to diversify away the concentration risk in Japan) and western players (driven by a need to cut costs and diversify their manufacturing base away from China). We believe that a robust export market can also help Indian companies diversify their revenue stream away from only the domestic market given that the Indian market can be impacted in times of unusual weather conditions. Some of the prominent players in pesticide exports are Rallis and PI Industries. PI Industries has shown significant growth in its custom synthesis and manufacturing business (CSM) over the past few years, underscoring the strong potential of the industry.
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Figure 24: PI Industries CSM revenue

7,000 6,000 5,000 INR mn 4,000 3,000 2,000 1,000 0 FY10
Source: Company, Standard Chartered Research
FY11
FY12
FY13
Key players. We present an overview of the key players in the domestic pesticides market below. A detailed overview of the players is given in Appendix 1. Figure 25: Key pesticide players in India
FY13 revenues (INR bn) FY13 EBITDA (INR bn)
Company International players Bayer Cropscience Syngenta India Domestic players Rallis UPL
Key points
27.2 NA
3.6 NA
Access to innovator products High brand recall
14.6 91.9
2.1 16.6
High brand recall Significant export presence Wide portfolio largest in India Has global presence Strong CSM presence Co-marketing/ in-licensing model for domestic Focused on brand building Herbicides a focus area Traditionally fertilizer player High recall esp. in AP
PI Industries
11.5
1.8
Dhanuka Coromandel
5.8 90.3
0.8 7.7
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Brand and distribution driven market

The pesticides market is unorganised and identifying key attributes that distinguish winners can be difficult. We conducted on the ground checks with over 33 dealers across seven states in India to identify key differentiators between companies. With the market being dominated by generic products, brands stood out as a winning attribute almost unanimously across states. The strength of distribution and farmer engagement were the other key winning attributes. Rallis and UPL are among the top domestic branded players. Rallis and Coromandel have differentiated distribution/farmer engagement models. Brand and distribution/ farmer engagement are critical for success in pesticides market To identify the key attributes distinguishing the winners in the Indian crop protection space, we spoke with over 33 agriculture distributors across various geographies in India. The strength of a brand emerged as the single largest differentiator and determinant of buyer behaviour. Figure 26: State-wise key determinants of buyer behaviour
Distribution/ farmer engagement Chemical composition Other factors (price, word of mouth etc)
States Maharashtra Karnataka Andhra Pradesh Gujarat Punjab Haryana Uttar Pradesh
Brand
Rank 1 2
Colour
Rank 3 4
Colour
Source: Standard Chartered Research
Survey breadth and methodology. We surveyed 33 agro input distributors across seven states in India. These seven states together accounted for 69% of Indias agriculture output in FY13.
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Figure 27: Location of dealers surveyed
Ludhiana (3 dealers)
Chandigarh (2 dealers) Sirsa (4 dealers)

Bilhaur (1 dealer)
Kurukshetra (1 dealer)
Saharanpur (2 dealers)
Hamirpur (1 dealer) Vadali (1 dealer)
Rajkot (1 dealer)
Ahmedabad (3 dealers)
Aurangabad (4 dealers) Nashik (1 dealer)

Rajanagaram (2 dealers) Jaggampet (2 dealers)
% of India's agriculture output
Hubli (1 dealer)
> 10 5 - 10 <5 NA
Bangalore (3 dealers) Mysore (1 dealer)
Source: RBI, Standard Chartered Research
Our questions to dealers were focussed on determining the key determinants of buyer preferences and indentifying companies that are most distinguished based on the winning factors thus determined. Brand emerged as key differentiator across the seven states we surveyed Brand. From our survey, the strength of a brand emerged as the single most important variable impacting buyer decisions across the states. During our visits and conversations, we came across the instance of a branded product from Bayer, Confidor, which sells at over 2x its generic peers. The fact that Confidor is rated among the top brands in the Indian agrochemicals space despite this fact highlights the strength of the brand. Rallis featured as the most successful domestic brand, followed by UPL, from our survey. Most dealers were of the view that level of brand stickiness is medium to high among their customers.
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Figure 28: Brand performance ranking

Distributors brand performance ranking States Maharashtra Karnataka Andhra Pradesh Gujarat Punjab Haryana Uttar Pradesh 1 Syngenta Bayer Bayer Bayer Bayer Syngenta Bayer 2 Bayer Rallis Syngenta Rallis Syngenta Bayer UPL 3 Dow Syngenta Rallis UPL Indofil Rallis Rallis 4 Rallis Dupont Coromandel Dupont Rallis Monsanto Syngenta
Farmer engagement programmes that build relationship and trust are as critical as breadth of distribution
Distribution. As seen in Fig. 28 above, the width of distribution and farmer engagement is key for industry players to be able to differentiate their offerings. This is understandable given the generic nature of the Indian crop protection market and the lack of exclusivity from retailers and dealers. A summary of distribution networks of companies under our coverage is given below. Figure 29: Distribution network strength Rallis No. of dealers No. of retailers c.2,500 >40,000 PI >9,000 >40,000 Kaveri c.15,000 NA UPL c.7,000 NA Coromandel > 7,000 NA
We believe that while breadth of reach through third-party retail channels is important, there is sustainable advantage to be achieved through direct farmer outreach programs. According to our dealer survey, the demonstration of product strength through field trials has proved to be the most successful method when launching a new product in most of the markets. Therefore, we believe that companies that have stronger farmer engagement programs are better placed vs. their peers and such programs can be instrumental in establishing brand equity. Two examples of farmer outreach programs are in the case of Rallis and Coromandel Fertilizers. I. Rallis Kisan Kutumbha: The Rallis Kisan Kutumbha (RKK) is one of the most extensive privately run farmer outreach programs in the country and has a strength of c.1mn farmers currently. Under this program, Rallis maintains a comprehensive data base of the member farmers including their cropping patterns, yields and input usage. Rallis provides on the ground support including regular farm visits, providing extensive technical advice, appraising farmers of latest developments and organizing seminars for interaction with agronomists and experts. In addition to this, Rallis also sets up demo farms at the member farmer areas to demonstrate the difference in yields owing to adoption of best practices and agro inputs. Besides providing a strong relationship with farmers and an avenue to promote Rallis own products, RKK also allows the company to get inputs and market demand assessment from farmers for determining future product launch pipeline.
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II. Manna Gromor Centres (Coromandel Fertilizers): Manna Gromor Centres are retail outlets promoted by Coromandel Fertilizers. The company currently has over 600 centres spread across Andhra Pradesh and Karnataka, servicing close to 2mn farmers. The company targets to have 1,000 centres over the next few years. We visited a few MGCs and from our visits, some of the differentiated services being offered by MGCs to local farmers are as follows: a) b) c) d) Farmer helpline Transparent pricing and sale price disclosures Advice on best and optimum pesticide usages Comprehensive farm solutions under one roof.
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Seeds: Set to accelerate

We expect Indias seed market to grow at a CAGR of 15% to INR 230bn in 2017 from INR 110bn in 2012. We view the industry as attractive owing to low penetration of hybrid seeds, high barriers to entry and potential for non-linear growth. Kaveri Seed and Rallis are our preferred picks to play this theme. Ample scope for increasing hybrid seed penetration in India According to the International Seed Federation (ISF), Indias seed market is the sixth largest in the world and is estimated at c. USD 2bn (INR 113bn) for 2012. According to Assocham, the seeds market is expected to grow at a 15% CAGR over the medium term and we estimate the market to grow to INR 230bn by 2017. Figure 30: Indias seed market
250 Seed market
200
150 INR bn 100 50 0 2008 2009 2010 2011 2012 2017E

Source: ISF, Assocham, Standard Chartered Research
The size of Indias seed market looks low in comparison to global emerging market peers as shown in the chart below. Figure 31: Seed market vs. land area
12,000 10,000 Domestic seed market (USD mn) 8,000 6,000 4,000 Brazil 2,000 0 0 20 40 Turkey Argentina 60 80 100 120 Arable land (mn hectares) 140 160 180 Russia India China
Source: ISF, OECD-FAO, Standard Chartered Research
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21
While cotton has been dominating the hybrid market with 80% hybridization, crops such as rice have an extremely low hybridization rate (less than 5%). We believe that going forward, stronger emphasis on yield would necessitate higher use of hybrids in the country. Seed market offers non-linear growth and higher barrier to entry High barrier to entry. The key differentiator for seed companies is the strength of their research and development (R&D) franchise. Typically, development of a new seed takes 8-10 years between controlled atmosphere evaluation and commercial production, given seeds cannot be manufactured but only grown as part of biological processes. In addition, it takes another 3-4 years to generate acceptability of the seed among farmers. Therefore, once a seed variety is established in the market, it becomes difficult for a new entrant to challenge it for a long period of time and the innovator enjoys a strong competitive advantage. Non-linear growth. Typically, farmers test a seed in a small section of their farms to assess its viability and merits under local conditions. Once they are comfortable, the growth in area under new seed for a given farmer can be exponential. This offers opportunities for non-linear growth to companies that have seeds under testing with farmers. An instance of non-linear growth can be seen from the pattern of growth of Bt Cotton acreage in India since its introduction in 2002. Bt Cotton is the only large scale genetically modified seed being used in India currently. Figure 32: Bt cotton market in India
Bt cotton market India 30,000 25,000 20,000 15,000 38.4 10,000 13.0 5,000 0.8 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Source: ISAAA, Standard Chartered Research
Bt cotton area hectares 93.6 83.5 76.2 62.1 100 90 80 Area in lakh ha
22
70 60 50 40 30 20 10 0
INR mn
0.8
5.3
Genetically modified seeds can provide the next leg up Genetically modified (GM) seeds have relatively little adoption in India at the moment given GM seeds have been only approved for use in cotton so far. However, persistent low productivity, high food inflation and the strong impact of GM seeds witnessed on the cotton crop would necessitate the introduction of GM seeds in India over the medium term, in our view. However, it is difficult to predict the timing of such approvals given that attempts to introduce GM seeds have been met with strong resistance from various interest groups in the past. We are not currently building in any upside from the adoption of GM seeds into our forecasts.
26 February 2014
Figure 33: Productivity of cotton after introduction of Bt cotton

600 500 Yield kgs per hectare 400 300 200 100 0 FY91 FY01 FY02 FY03 FY04 FY05 FY06 FY08 FY09 FY10 FY11 FY12 FY13
23
Cotton yield kgs (per hectare)
Source: Cotton Advisory Board, Standard Chartered Research
Eventual introduction of GM seeds can boost seed market but can also impact pesticides demand
Issues related to GM seeds Currently, use of GM seeds is banned in India except in the case of cotton. Also, Bt gene currently used for GM cotton seeds is patented by Monsanto and domestic players pay a royalty to Monsanto for the use of this gene. Even in future, if and when Bt is introduced in other crops, domestic players would need to pay a royalty for use of specific patented genes. The impact of GM on pesticides and other agro inputs is another issue that needs to be assessed further in the event GM is allowed into the country. Note that while initially after the introduction of Bt Cotton, pesticide usage for the cotton crop declined, however, newer varieties of pests (sucking pests) have since emerged, necessitating introduction of new pesticide molecules. Key players. We present an overview of the key players in the seeds market below. A detailed overview of the players is given in Appendix 1. Figure 34: Key seed players in India
FY13 revenues (INR bn) NA 4.4 FY13 EBITDA (INR bn) Key points NA 0.7 Focus on maize and rice seeds Predominantly a seeds player Only listed subsidiary of Monsanto globally Largest cotton seed player unlisted No. 2 player in cotton seeds market only listed seeds pure play Through 80% subsidiary Metahelix Associate of UPL Significant export presence
Company International players Syngenta Monsanto Domestic players Nuziveedu Seeds Kaveri Seed Rallis Advanta Seeds
NA 7.1 14.6 10.7*
NA 1.4 2.1 1.7*
* Advanta seeds revenue and EBITDA is CY ended 2012 Source: Company, Standard Chartered Research
26 February 2014
FY07
Our framework for evaluating companies

We value companies under our coverage on six key parameters brand, distribution, product mix, export mix, leverage and working capital. Rallis fares the best on the two attributes (brand and distribution/ farmer engagement) that are considered key differentiators based on our on-the-ground dealer survey. Rallis and PI Industries emerge as our top two picks based on their financial and operational factors mentioned above. While this framework is instrumental in identifying long-term winners, valuation distortions can impact short-term stock preferences. Based on our understanding of industry fundamentals, we introduce our proprietary framework to evaluate the relative attractiveness of the listed agro-input players in India. We assess each company individually and rank each of the five companies under our coverage between 1 to 5 with 1 being the most attractive. To narrow down on the attributes, we have used findings from our on-the-ground survey of agro-input dealers and ranked companies based on their brand and distribution/farmer engagement strength. In addition, we use attributes such as product and geographical diversification to assess the ability of a business to withstand domestic weather-related volatility; and leverage and working capital to the assess their financial strength. Our framework evaluates companies based on six operational and financial parameters- Rallis and PI emerge as top picks Our overall ranking for companies under our coverage is shown below. Figure 35: Ranking of companies under our coverage Rallis Strength of brand Distribution/ farmer engagement Product diversification Geographic diversification Leverage Working capital Overall Rank
Source: Standard Chartered Research Note: * CRIN financials not available separately for non-fertilizer business beyond EBITDA line. Note: ** We have rated UPLs India business only for ranking of exports, leverage/ working capital at global levels
PI 3 2 4 1 3 3 2
Kaveri 2 4 5 4 1 1 3
UPL** Coromandel* 2 4 2 1 4 4 4 3 2 3 NA NA NA NA
1 1 1 3 2 2 1
We believe that our framework can serve as a useful tool in assessing the long-term winners in the Indian agro-input space. We, however, recognize that valuations would also play a crucial role in determining short-term preferences within our coverage universe. A detailed assessment of the six factors considered by us above is given below. Strength of brand. We rate companies with stronger brand perception higher. Based on our survery of agro-input distributors, Rallis stands out as the player with the highest brand recall in our coverage universe, followed by UPL. Kaveri Seed is seen as one of the top 2 brands in cotton seeds.
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Figure 36: Ranking based on brand and distribution strength Rallis No. of districts with recall Rank
PI 1 3
Kaveri 2 2
UPL 2 2
Coromandel 1 3
7 1
No. of districts with recall based on our survey of 33 dealers across 7 states in the country
Distribution/ farmer engagement. While the companies under our coverage have varying degrees of reach through distributors and retailers, we also assess differentiated farmer outreach programs adopted by companies to rank them. On this basis, Rallis with the RKK program stands out as a differentiated player with a competitive edge while Coromandels focus on farmer engagement through Manna Gromor Centres (MGC) makes it stand out. RKK is a farmer engagement program with over 1mn members and aims to provide on-site assitance to its members. Similarly, Coromandels MGC initiative helps it engage directly with the farmers though its 650 retail outlets. PI Industries with its differentiated product offering (exclusive molecules) has a differentiated offering, in our view. Figure 37: Ranking based on brand and distribution strength
Rallis No. of dealers No. of retailers Differentiated strategy Rank c.2,500 >40,000 PI >9,000 >40,000 Kaveri c.15,000 NA NA 4 UPL c.7,000 NA NA 4 Coromandel > 7,000 NA Manna Gromor Centre 2
Rallis Kisan Focus on inKutumbha licensing 1 2
Product mix diversification. We believe that players with a more diverse product mix would have a better and more stable revenue profile vs. players with a single product focus. This is owing to (1) the higher number of touch points with the consumer and (2) the ability to offset seasonal and cyclical weakness in one product line with other products. Rallis and UPL feature best on this measure. Figure 38: Ranking based on product mix diversification
Rallis Pesticides Seeds PGN Organic manure Rank X X X X 1 4 5 X PI X X Kaveri UPL X X X X 2 X X 3 Coromandel X
Source: Standard Chartered Research.
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Geographic diversification. In addition to product diversification, players with exposure to export markets fare well, given their ability to better withstand the volatility owing to weather-related issues in one geography. UPL, PI Industries and Rallis fare best on this metric within our coverage universe. In addition, the presence in the fast growing contract manufacturing segment of the export market can provide strong growth given favourable industry dynamics. Rallis and PI are the two players that have a significant presence in this segment. Figure 39: Ranking based on geographic diversification
Rallis Exports/ Sales Rank 29% 3 PI 55% 1 Kaveri NA 4 UPL 56% 1 Coromandel NA NA
Source: Companies, Standard Chartered Research. Note: UPL standalone export numbers taken for this analysis.
Leverage. Companies with lower leverage are better positioned to withstand any volatility owing to weather-related hardships, deserving higher rankings. Figure 40: Ranking based on leverage and working capital
Rallis Net debt/ EBITDA (FY13) Rank
PI 1.1x 3
Kaveri -1.0x 1
UPL 1.4x 4
CRIN NA NA
0.5x 2
Working capital. A higher working capital intensity can be a sign of potential weak product demand leading to higher stickiness of inventory or more linient terms of trade to dealers. Kaveri Seed and Rallis fare best on this parameter. Figure 41: Rating based on leverage and working capital
Rallis Net working capital days (FY13) Rank
PI 84 3
Kaveri 31 1
UPL 105 4
Coromandel NA NA
45 2
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Sector valuation
Valuations for Indian agro-input companies are at the higher end of their historical trading range. Nevertheless, we believe that valuations could sustain at current levels owing to significantly better EPS growth and RoEs for the industry vs. history. We have considered the four companies under our coverage that are pure plays on sub-sectors that we prefer (pesticides, seeds and pesticides export) for the purpose of assessing sector valuations.The companies are Rallis, UPL, PI Industries and Kaveri Seed. Valuations for the sector are given below. Figure 42: Agro-input sector valuation
20 18 16 PER multiple 14 12 10 8 6 4 2 0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Agri sector custom index forward PER Average +1 SD -1 SD
Source: Bloomberg, Standard Chartered Research
As can be seen above, sector valuations are currently towards the higher end of their historical trading range. Nevertheless, given the high EPS growth and RoE trends, we believe that current valuations are sustainable. Figure 43: Sector valuation vs. EPS growth
Agri sector custom index forward PER Average +1 SD -1 SD Agri sector EPS growth
Figure 44: Sector valuation vs. forward RoE

Agri sector custom index forward PER Average +1 SD -1 SD Agri sector ROE
20
60% 40%
20
30%
PER multiple
EPS growth
PER multiple
10
20% 0%
10
25%
0 Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
-20% Jan-14
0 Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
20% Jan-14
While we remain convinced of the structural strength of the Indian agro inputs market one key cyclical risk to valuations is obviously the weather, given the high correlation Indian farmer incomes have with the monsoons (please refer to Fig. 10).
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ROE
27
Rallis India
The power of branding
Rallis is the strongest domestic brand in Indias pesticides OUTPERFORM (initiating coverage) space. Brand is the key differentiator for agro-input PRICE as of 25 Feb 2014 PRICE TARGET companies, based on our survey of dealers across India. Rallis has the widest range of products among companies in our coverage universe, providing it with the ability to withstand cyclical pressures in any given product line. Rallis exports business provides a hedge against domestic cyclicality, while growth unfolds in its nascent seeds and organic manure businesses. We initiate coverage of Rallis with an Outperform rating and a March-2015 price target of INR 200. Quality play across multiple agriculture inputs. As revealed in our survey of more than 30 agro-input dealers across seven states in India, Rallis enjoys the strongest brand recall among domestic players, providing the company with a competitive edge. In addition, the company has one of the widest range of product offerings among Indian players, including its exports business, which provides stability to its overall business model. Unique farmer connect. Rallis has one of the most far-reaching farmer connect programmes (Rallis Kisan Kutumbha) in India. In our view, the programme helps the company gain unique insights into the domestic demand scenario, while enabling cross-selling of multiple products through a consultative approach with farmers. Non-pesticides portfolio set for strong growth. Rallis has a stated strategy to increase the contribution from its non-pesticides business to 40% (15% currently) over the next few years. According to management, this would be achieved through higher growth of nascent businesses, such as seeds and contract manufacturing, which can also be margin-accretive. Hidden value in land. While we do not ascribe any value to Rallis land holdings, the company has idle land bank in Navi Mumbai and Secunderabad, which, we believe, can be monetised to unlock value for its shareholders. Initiate with Outperform. We initiate coverage of Rallis with an Outperform rating and a March-2015 price target of INR 200, based on 17x 12-month forward PER. Risks. Key risks include: (1) adverse weather conditions, (2) adverse FX movement, and (3) irrational expansion.
Year-end: March Sales (INR mn) EBITDA (INR mn) EBIT (INR mn) Pre-tax profit (INR mn) Net profit adj. (INR mn) FCF (INR mn) EPS adj. (INR) DPS (INR) Book value/share (INR) EPS growth adj. (%) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Div. payout (%) Net gearing (%) ROE (%) ROCE (%) EV/sales (x) EV/EBITDA (x) PBR (x) PER adj. (x) Dividend yield (%) 2013 14,582 2,106 1,790 1,723 1,190 649 6.12 2.30 31.92 2.3 4.5 14.4 12.3 8.2 37.6 16.9 20.3 25.8 1.9 13.0 3.6 22.0 1.7 2014E 17,474 2,579 2,207 2,152 1,475 1,487 7.58 3.03 35.95 23.9 31.9 14.8 12.6 8.4 40.0 10.6 22.3 29.8 1.8 12.1 4.4 20.7 1.9 2015E 20,832 3,133 2,749 2,717 1,844 1,406 9.48 3.79 41.00 25.1 25.1 15.0 13.2 8.9 40.0 8.4 24.6 33.1 1.5 10.0 3.8 16.6 2.4 2016E 24,531 3,805 3,411 3,382 2,283 1,823 11.74 4.70 47.25 23.8 23.8 15.5 13.9 9.3 40.0 4.0 26.6 36.1 1.3 8.1 3.3 13.4 3.0
INR 157.00
Bloomberg code
INR 200.00
RALL.BO
Reuters code 12-month range
RALI IN
Market cap
INR 30,532mn (USD 492mn)

EPS adj est change NA
INR 109.55 - 184.90
Source: Company, Standard Chartered Research estimates
Share price performance

Rallis India 190 150 110 Feb-13 BSE SENSEX 30 INDEX (rebased)
May-13
Aug-13
Nov-13
Feb-14
Share price (%) Ordinary shares Relative to index Relative to sector Major shareholder Free float Average turnover (USD)
Source: Company, FactSet
-1 mth -3 -2 -
-3 mth -12 mth -4 29 -5 19 Tata Group (50.1%) 50% 583,088
Sumit Choudhary
26 February 2014
RALI IN INR 157.00 INR 200.00
28
Investment thesis
High-quality play across the breadth of Indias agriculture inputs space We view Rallis as a high-quality play on Indias agriculture inputs space. The company has some of the strongest brands in the country its products comprise seven of the top-ten pesticide brands in India. Figure 45: Rallis Brand positioning
Source: Company
Following our conversations with dealers (33 dealers in seven states across India), Rallis emerged as the strongest domestic brand in most of the states. Figure 46: Rallis Brand presence
Distributors brand performance ranking States Maharashtra Karnataka Andhra Pradesh Gujarat Punjab Haryana Uttar Pradesh
1 Syngenta Bayer Bayer Bayer Bayer Syngenta Bayer
2 Bayer Rallis Syngenta Rallis Syngenta Bayer UPL
3 Dow Syngenta Rallis UPL Indofil Rallis Rallis
4 Rallis Dupont Coromandel Dupont Rallis Monsanto Syngenta
In addition, we believe that Rallis strong range of products through multiple offerings, such as seeds, organic manure, agricultural implements and pesticides, provides the company with multiple touch-points with the farmer. Figure 47: Rallis presence across multiple products
Product Pesticides Seeds Organic manure Rallis presence Herbicides, insecticides and fungicides Through Metahelix, an 80% subsidiary of Rallis Through 51% subsidiary, Zero Waste Agro
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Unique farmer connect Rallis has a wide reach among farmers through its on-the-ground sales force and farmer outreach programmes. The company also has a practice of conducting focused group discussions (FGDs) with farmers to gauge their product requirements. According to management, Rallis conducted FGDs with over 4,000 farmers in more than 20,000 villages over the seven years up to FY12. We believe such a strategy provides the company with unique insights into farmer requirements. Apart from FGDs, Rallis has numerous farmer outreach programmes (see figure below): Figure 48: Rallis farmer outreach programmes
Rallis Kisan Kutumbha Samrudh Krishi Grow More Pulses (MoPu) Database of more than 1mn famers and their cropping patterns and input preferences For grapes, cumin and chilly farmers 0.9mn acres covered with 0.16mn farmers engaged in FY13 support for crop productivity and marketing of pulses
Such farmer outreach programmes help Rallis cross-sell its products such as seeds and could prove to be an enabler of strong growth and premium pricing, in our view. Exports business provides a hedge against domestic volatility The exports business constitutes c.30% of Rallis overall revenues. The business involves exports of generic pesticides, including registering molecules internationally. In addition, the company also has a presence in the contract manufacturing space for international players. Rallis has partnered with numerous players for contract manufacturing in agrochemicals, fine and specialty chemicals, and polymer/ pharmaceutical intermediates. Moreover, we expect the companys foray into the CSM business to help generate strong growth in its exports business. Figure 49: Rallis International revenue growth
8,000 7,000 6,000 5,000 INR mn 4,000 3,000 2,000 1,000 0 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
International revenue
CAGR 23%
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Non-pesticide business set for solid growth Management has a stated strategy to increase the share of its non-pesticide portfolio to 40% over the next few years, from c.15% in FY13. We believe that while a part of this shift in the mix would come from inorganic growth, a major portion would also be driven by organic growth. We expect the share of the non-pesticides business to organically increase to 26% by FY16E. Rallis acquired a majority stake in Metahelix Life Sciences, a seed research and manufacturing company, in December 2010. We believe that given its potential to leverage on Rallis strong distribution strength and brand presence, the seed business can deliver significant growth going forward. In addition, EBITDA margin of Rallis seeds business is currently lower than its industry peers (we estimate its FY13 EBITDA margin of 14%, versus Kaveri Seeds EBITDA margin of more than 20%) and expected to increase as Metahelix gains scale. We have not assumed any upside from any potential introduction of GM seeds in non-cotton crops in future. Figure 50: Metahelix Revenue growth
4,000 3,500 3,000 CAGR 37% 2,500 INR mn 2,000 1,500 1,000 500 0 FY12 FY13 FY14E FY15E FY16E
Metahelix revenue
Hidden value in land. While we do not ascribe any value to the land bank owned by Rallis, we note that the company has idle land in two locations: (1) c.25 acres in Navi Mumbai; and (2) c.90 acres in Secunderabad. We believe these can be monetised in future, especially if the company needs additional resources for inorganic expansion.
Valuation
We value Rallis on a 12-month forward PER multiple of 17x, to arrive at our March2015 price target of INR 200 per share. Our target multiple is in line with the historical PER for Rallis. We believe that a 17x target multiple is justified, given (1) the expected RoE improvement (to 27% in FY16E from 20% in FY13); and (2) the expected robust EPS CAGR of 24% during FY13-16E.
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Figure 51: Rallis Historical PER band

35.0 30.0 25.0 PER multiple 20.0 15.0 10.0 5.0 0.0 Jan-09 Target PER 17x Rallis India forward PER Average +1 SD -1 SD
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Risks
Key risks to our investment view arise from the following: Adverse weather: Like all agriculture businesses, Rallis is also exposed to significant swings in domestic weather conditions, particularly the monsoon. In addition, the company is also exposed, albeit to a lesser extent, to fluctuations and changes in cropping patterns in international geographies owing to its presence in markets such as the US and Latin America. Adverse foreign exchange movements: Rallis imports a sizable portion of its raw materials, and, therefore, adverse foreign exchange movement could impact its profitability. However, we believe that the companys exports business could act as a cushion in such a scenario. Irrational expansion: Management has a stated target of achieving 40% revenue from its non-pesticide business over the next few years. While we think this is the correct strategy to follow, we believe any haste on its part to achieve this target through expensive acquisitions would be detrimental to our investment case.
Business description
Rallis is a Tata Group company engaged in a wide gamut of agricultural inputs. The company is one of the largest players in the Indian agriculture inputs space, with revenue of INR 14.6bn in FY13. The key business divisions of Rallis are as follows: Pesticides: This division has a wide range of insecticides, fungicides and herbicides, which target Indian agricultural conditions, with emphasis on crops such as rice, cotton and vegetables. In the pesticides segment, Rallis introduces its own generic molecules, in addition to in-licensing and co-marketing products from global players. Some of its international partners include FMC, Syngenta, Nihon Nohyaku and DuPont.
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Some of Rallis popular products are given below: Figure 52: Rallis Popular products
Product Insecticides Fungicides Herbicides
Rallis presence Takumi, Mida, Reeva, Rogor, Asataf, Manik Contaf, Master, Fujione Fateh, Tata Metri, Tata Panida
Rallis has a distribution network that covers 80% of Indias districts, with c.2,500 dealers and more than 40,000 retailers across India. Domestic institutional business: This division is engaged in providing technical and bulk composition of various molecules to companies such as Bayer, Syngenta, UPL, Cheminova, among others. International business: Rallis international business is engaged in the competitive generic pesticide segment in more than 50 countries globally. The growth strategy is through partnerships, new registrations and contract manufacturing. For contract manufacturing, Rallis has the largest pesticide manufacturing capacity in the country, with a production capacity of more than 10,000MT of technical grade pesticide and 30,000 tonnes of formulations annually. Non-pesticides portfolio: Rallis non-pesticide portfolio comprises divisions such as seeds, organic manure and plant growth nutrients. The company plans to increase the proportion of non-pesticide sales to 40% over the next few years. Metahelix: Rallis has an 80.46% stake in Metahelix, which is predominantly engaged in the development and sale of hybrid seeds through its 100% subsidiary, Dhanya Seeds. Dhanya is a technology-driven, hybrid seeds business, with seeds predominantly in rice, maize, pearl millet and vegetable crops. Zero Waste Agro Organics (ZW): Rallis has a 51.02% stake in ZW, which is an organic soil conditioner manufacturing company. Rallis has a majority representation on the board of the company. Management: An overview of Rallis key management is given below: Figure 53: Rallis Board of directors
Gopalakrishnan V Shankar Homi R Khusrokhan B D Banerjee Eknath A Kshirsagar Prakash R Rastogi Bharat Vasani R Mukundan Y K Alagh Y S P Thorat
Source: Company
Chairman Managing Director and CEO Director Director Director Director Director Director Director Director
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Financials
We present below the key assumptions used to project Rallis financials: Domestic formulation and institutional business: We assume a CAGR of 11% in FY14-16E in our projections. This is in line with the growth which the company has been witnessing in FY08-14E. International business: Despite the renewed focus of management on the custom synthesis business and the company having recently entered into new geographies like Latin America, we project a 17% CAGR in the international business in FY1416E, versus a 20% CAGR generated in FY08-14E. Non crop business: We project the non-crop business to grow at a CAGR of 41% in FY14-16E. This would largely be driven by growth in the companys seeds portfolio. We estimate that the seeds business (predominantly the hybrid seed selling business through Metahelix) will constitute more than 60% of Rallis non -crop business revenue by FY16E. Given these assumptions, we estimate the non-crop portfolio will comprise 26% of Rallis total revenues by FY16E. Figure 54: Non-crop business revenue and non-crop business revenue as % of total
7,000 6,000 5,000 INR mn 4,000 3,000 2,000 1,000 0 FY10 2% FY11 4% FY12 FY13 FY14E FY15E FY16E 15% 11% 18% 22% Non-corp revenue As % of total company revenue 26% 30% 25% 20% 15% 10% 5% 0% as % of revenue
Revenues: We expect Rallis overall revenues to increase at a CAGR of 18% in FY14-16E owing to our aforementioned assumptions. Figure 55: Rallis Revenue and revenue CAGR
30,000 25,000 20,000 INR mn 15,000 10,000 5,000 0 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Revenue
CAGR 18%
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Margins: We estimate EBITDA margin for the seeds business will increase to 19% by FY16E from 16% in FY14E. Pure-play seed companies such as Kaveri Seeds currently have an EBITDA margin of more than 20%. We believe that as Metahelixs business gathers scale, margins should increase to similar levels as other pure-play seed players in the industry. We estimate EBITDA margins for the crop protection business will continue to be in the 14-15% range over FY14-16E. Figure 56: Seeds and overall EBITDA margins
Seed business EBITDA margin (%) 20% 18% 16% 14% EBITDA margin 12% 10% 8% 6% 4% 2% 0% FY12 FY13 FY14E FY15E FY16E
Overall EBITDA margin (%) 17% 15% 15%
19% 16%
17% 16% 14% 14% 16%
EPS growth: Given our revenue and margin projections, we believe that Rallis EPS would increase to INR 11.74 by FY16E from INR 7.58 in FY14E, implying a CAGR of 24% over the two-year period. We also expect its RoE to improve to 27% by FY16E from 22% in FY14E.
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35
Income statement (INR mn)

Year-end: Mar Sales Gross profit SG&A Other income Other expenses EBIT Net interest Associates Other non-operational Exceptional items Pre-tax profit Taxation Minority interests Net profit Net profit adj. EBITDA EPS (INR) EPS adj. (INR) DPS (INR) Avg fully diluted shares (mn) 2012 12,749 5,356 (2,332) (1,280) 1,743 (139) 62 1,666 (487) (15) 1,164 1,164 2,030 5.98 5.98 2.20 194 2013 14,582 5,803 (2,616) (1,396) 1,790 (178) 110 1,723 (535) 2 1,190 1,190 2,106 6.12 6.12 2.30 194 2014E 17,474 6,902 (2,883) (1,812) 2,207 (125) 70 2,152 (667) (10) 1,475 1,475 2,579 7.58 7.58 3.03 194 2015E 20,832 8,228 (3,437) (2,042) 2,749 (103) 70 2,717 (842) (30) 1,844 1,844 3,133 9.48 9.48 3.79 194 2016E 24,531 9,690 (4,048) (2,231) 3,411 (99) 70 3,382 (1,048) (50) 2,283 2,283 3,805 11.74 11.74 4.70 194
Cash flow statement (INR mn)

Year-end: Mar EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions & Investments Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2012 1,743 287 (139) (487) (587) (125) 692 (986) 410 (576) (428) (83) 369 (22) (164) (48) (294) 2013 1,790 315 (178) (535) (412) 112 1,094 (445) 186 (259) (447) (66) (227) 35 (705) 129 649 2014E 2,207 371 (125) (667) 141 60 1,987 (500) (500) (1,000) (690) 0 (500) 10 (1,180) (193) 1,487 2015E 2,749 383 (103) (842) (322) 40 1,906 (500) (500) (1,000) (863) 0 0 30 (833) 73 1,406 2016E 3,411 394 (99) (1,048) (355) 20 2,323 (500) (500) (1,000) (1,069) 0 0 50 (1,019) 304 1,823
Balance sheet (INR mn)

Year-end: Mar Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long-term assets Total long-term assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible bonds Deferred tax Other long-term liabilities Total long-term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year-end shares (mn) 2012 112 30 1,035 2,717 442 4,336 3,961 1,808 1,109 6,878 11,214 685 2,471 1,194 4,350 856 131 333 1,320 5,669 5,530 14 5,545 11,214 1,429 194 2013 258 10 1,648 2,672 304 4,893 3,903 1,997 1,110 7,009 11,902 1,206 2,503 1,180 4,889 107 286 364 758 5,647 6,207 47 6,254 11,902 1,055 194 2014E 66 10 1,915 3,112 304 5,407 4,031 1,997 1,610 7,638 13,045 706 3,351 1,180 5,238 107 286 364 758 5,996 6,992 57 7,049 13,045 748 194 2015E 138 10 2,283 3,710 304 6,446 4,148 1,997 2,110 8,254 14,700 706 3,995 1,180 5,882 107 286 364 758 6,640 7,973 87 8,060 14,700 676 194 2016E 443 10 2,688 4,369 304 7,814 4,254 1,997 2,610 8,860 16,674 706 4,705 1,180 6,591 107 286 364 758 7,349 9,188 137 9,325 16,674 371 194
Financial ratios and other

Year-end: Mar Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj. (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op. cash/EBIT (x) Depreciation/capex (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj. (x) PBR (x) Dividend yield (%) 2012 42.0 15.9 13.7 9.1 29.2 17.4 -7.7 -7.7 -7.7 10.0 2013 39.8 14.4 12.3 8.2 31.0 14.4 2.3 2.3 2.3 4.5 2014E 39.5 14.8 12.6 8.4 31.0 19.8 23.9 23.9 23.9 31.9 2015E 39.5 15.0 13.2 8.9 31.0 19.2 25.1 25.1 25.1 25.1 2016E 39.5 15.5 13.9 9.3 31.0 17.8 23.8 23.8 23.8 23.8
22.0 26.8 1.2 0.4 0.3 123.6 30.0 127.1
20.3 25.8 1.3 0.6 0.7 112.0 33.6 103.4
22.3 29.8 1.4 0.9 0.7 99.8 37.2 101.1
24.6 33.1 1.5 0.7 0.8 98.8 36.8 106.4
26.6 36.1 1.6 0.7 0.8 99.3 37.0 107.0
25.8 11.9 1.0
16.9 9.7 1.0
10.6 16.0 1.0
8.4 26.0 1.1
4.0 32.2 1.2
2.3 14.7 17.1 24.5 24.5 4.3 1.5
1.9 13.0 15.3 22.0 22.0 3.6 1.7
1.8 12.1 14.2 20.7 20.7 4.4 1.9
1.5 10.0 11.4 16.6 16.6 3.8 2.4
1.3 8.1 9.1 13.4 13.4 3.3 3.0
26 February 2014
36
PI Industries
A different kettle of fish
PI Industries (PI) has a differentiated business model OUTPERFORM (initiating coverage) through exposure to high growth contract manufacturing PRICE as of 25 Feb 2014 PRICE TARGET business and its domestic pesticides business. PI is one of our two top picks in the Indian agro-input universe and we forecast an FY14-16E earnings CAGR of 29%. Order book (2.4x) and customer relationships provide CSM growth visibility while the focus on innovative in-licensed molecules makes PIs domestic business attractive, in our view. We initiate coverage with an Outperform rating and a March 2015 target price of INR 325. Well-established CSM business. PI is the largest listed player (by turnover) in the high growth custom synthesis and manufacturing (CSM) space in India. The company also has an order book of USD 365mn in the CSM space (c.2.4x FY14E revenue), which provides strong visibility for revenue. Differentiated domestic model. PI differentiates itself in the domestic branded pesticides market by focussing on unique molecules through in-licensing and co-marketing tie ups with innovators. The company gets exclusive marketing rights for such molecules in India and works to develop the market through its sales and distribution channels. High RoE, turning FCF positive. We estimate an RoE of 29% over FY14-16E. We expect the company to generate free cash flow from FY14E onwards and forecast an impressive FY14-16E EPS CAGR of 29%. Initiate with Outperform rating. We initiate coverage of PI with an Outperform rating and a 12-month forward DCF-based price target of INR 325. Our target price translates to a 12-month forward PER of 15x. PI is one of our two top picks in the Indian agro-inputs space. Risks. Key risks include: (1) adverse weather; (2) adverse foreign exchange movements; (3) increased competition in the CSM space; and (4) concentration risk.
280 190 100 Feb-13
INR 253.15
Bloomberg code
INR 325.00
PIIL.BO
PI IN
Market cap

INR 117.65 - 266.55
Year-end: March Sales (INR mn) EBITDA (INR mn) EBIT (INR mn) Pre-tax profit (INR mn) Net profit adj. (INR mn) FCF (INR mn) EPS adj. (INR) DPS (INR) Book value/share (INR) EPS growth adj. (%) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Div. payout (%) Net gearing (%) ROE (%) ROCE (%) EV/sales (x) EV/EBITDA (x) PBR (x) PER adj. (x) Dividend yield (%)
2013 11,514 1,829 1,609 1,450 973 (990) 7.59 1.00 39.25 -7.8 0.0 15.9 14.0 8.5 13.1 22.7 27.5 1.4 8.8 3.2 14.4 0.9
2014E 16,234 3,033 2,714 2,649 1,775 1,125 12.83 1.50 49.93 69.0 50.0 18.7 16.7 10.9 11.6 29.2 36.3 2.2 11.8 5.1 19.7 0.6
2015E 20,559 3,833 3,450 3,414 2,288 175 16.54 2.00 64.25 28.9 33.3 18.6 16.8 11.1 12.0 29.2 37.8 1.8 9.4 3.9 15.3 0.8
2016E 25,370 4,850 4,395 4,393 2,944 889 21.28 2.50 82.78 28.7 25.0 19.1 17.3 11.6 11.7 29.2 38.7 1.4 7.3 3.1 11.9 1.0

PI Industries BSE SENSEX 30 INDEX (rebased)
May-13
Aug-13
Nov-13
Feb-14
-1 mth -3 mth -12 mth 14 14 99 16 12 84 Parteek Finance & Inv. Co. Ltd. (54.3%) 41% 450,925
Sumit Choudhary
26 February 2014
PI IN INR 253.15 INR 325.00
37
Investment thesis
Well established custom research player PI has deep-rooted relationships with international agrochemical players and has emerged as one of the foremost players in Indias CSM space. We see CSM as one of the most promising segments of the Indian agro-input market, and expect Indias pesticide exports to grow at a 2012-17E CAGR of 15%. PI is well placed owing to its legacy relationships and strength in the space, in our view. It also has an order book of USD 365mn in the CSM space (2.4x FY14E revenue), which provides strong visibility for revenue. Figure 57: PIs CSM revenue
18,000 16,000 14,000 12,000 INR mn 10,000 8,000 6,000 4,000 2,000 0 FY11 FY12 FY13 FY14E FY15E FY16E
CSM revenue
CAGR 49%
Differentiated strategy for domestic pesticides PI differentiates itself in Indias branded pesticides market through the introduction of exclusive molecules via in-licensing/co-marketing tie ups with global innovators. It obtains exclusive marketing rights for such molecules in India and then works to develop the market through its sales and distribution channels. We believe this focus on exclusive molecules gives PI a sustainable competitive advantage versus its peers. Figure 58: PIs domestic revenue
10,000 9,000 8,000 7,000 6,000 INR mn 5,000 4,000 3,000 2,000 1,000 0 FY11 FY12 FY13 FY14E FY15E FY16E
Domestic revenue
CAGR 12%
26 February 2014
38
High RoE model, turning cash flow positive to be trigger PI has a high RoE model and we project an RoE of 29% over FY14-16E. While rapid expansion of capacity has prevented the company from turning free cash flow positive in the past, we expect it to turn free cash flow positive from FY14E onwards. Figure 59: PI free cash flow profile
1,500 1,000 500 INR mn 0 -500 -1,000 -1,500 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Note: FCF = Cash flow from operations capex. Source: Company, Standard Chartered Research estimates
Free cash flow
Valuation
We value PI on a DCF model to arrive at our March 2015 price target of INR 325. Figure 60: DCF valuation of PI
INR mn Oper. EBIT (Less) taxes Net int. income/(exp) Marginal tax rate Tax shield adjustments NOPAT (Add) depreciation and amortisation (Less) capex (Less) working capital Other adjustments Free cash flow NPV (explicit FCF) NPV (terminal value) Firm value (Less) net debt Equity value Equity value/share
Source: Bloomberg, Standard Chartered Research estimates
FY14E 2,684 -874 -112 -33% 37 1,846 320 -1,000 30 1,196 7,738 37,478 45,216 783 44,433 324
FY15E 3,420 -1,127 -93 -33% 31 2,324 384 -1,500 -996 211
FY16E 4,365 -1,450 -93 -33% 31 2,946 455 -1,500 -1,009 892
FY17E 5,264 -1,780 -93 -33% 31 3,515 520 -1,250 -1,064 1,721
FY18E 6,362 -2,198 -93 -33% 31 4,194 580 -1,250 -1,277 2,246
FY19E 7,690 -2,715 -93 -33% 31 5,006 639 -1,250 -1,533 2,862
FY20E 9,297 -3,351 -93 -33% 31 5,977 699 -1,250 -1,839 3,586 5.0% 11.5%
Terminal growth rate (%) WACC (%)
26 February 2014
39
Our price target translates to 15x 12-month forward PE. While our price target is towards the higher end of PIs historical valuation range, we believe it is justified given the companys strong growth outlook and RoE profile. Figure 61: PI historical PE band
25 PI Industries forward PER Average +1 SD -1 SD
20 Target PER 15x
15 PER multiple
10
0 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Risks
Key risks to our investment view are: Adverse weather: Like all agriculture businesses, PIs India business is exposed to significant swings in weather conditions, particularly monsoons. While we believe PI is relatively hedged given its significant CSM business, adverse weather conditions in India could still impact PIs overall performance. Adverse foreign exchange movements: Given that the CSM business is export oriented, any adverse movements in foreign exchange rates could impact the performance of PI. Increased competition: While we believe there is a high amount of stickiness in the CSM business owing to the entrenched partnership model with customers, we understand that other companies (such as Rallis) are also targeting growth in this space. While we believe the overall CSM opportunity is large enough for more players, any adverse impact on growth or margins owing to increased competition could be a risk to our view. Client concentration: Given the limited number of innovators in the pesticides space PIs CSM business has a high level of customer and product concentration.
PI is an over 60-year old company that is engaged in two key segments: CSM and domestic pesticides. The company was founded in 1947 as Mewar Oil & General Mills. It diversified into the CSM business in 1990s and set up its first manufacturing site in Panoli, Gujarat.
26 February 2014
40
CSM division: We expect the division to contribute the majority of FY14 revenue. PIs offerings in this segment include contract research and contract manufacturing. The companys customer base is predominantly in Europe and Japan and includes some of the largest players in the global agrochemicals market. PI has also established a joint research facility for developing processes for the manufacture of electronic chemicals with Sony Corporation. PI has a strategy to engage with its customers early in the discovery process and is involved through the lifecycle of commercialisation of molecules. The process of conversion of an enquiry to actual opportunity can take two to five years. Figure 62: Sample process CSM
Sample process timeline
Customer Enquiry
Process & cost review
Dec-06
Enquiry recd
Pre Feasibility Study
Sample validation
Feb-07
1st sample sent to customer
Mar-07 Sign Secrecy Agreement SOP & Plant Design
Sample approved by customer
May-07
Process Evaluation Customer approval / agreement Jun-07
Scale up study undertaken
1st Commercial Order (SMT)
Bench Scale Trails
Detailed plant engg.
Aug-07
2nd Commercial Order (57 MT) [Supply up to Mar, 08] 3rd Commercial Order (200 MT) [Supply up to Mar, 09] Signed Agreement of 1500 mt (USD 36 mn) f or 3 yrs
Desktop costing
Plant erection & installation
Nov-07
Apr-09
Customer Approval Raw material procurement
Pilot / Kilo Lab Scale up
Commercial Production
The company has manufacturing facilities in Panoli and Jambusar in Gujarat that cater to the CSM business. Domestic pesticides business: The companys domestic pesticide business manufactures and markets pesticide formulations. In addition to the sale of generic molecules, PI has a differentiated strategy of focusing on in-licensed and comarketing innovative molecules. The company estimates that sales of exclusive inlicensed molecules make up over 60% of its sales. PI has a strong distribution network in India, with 9,000 dealers and over 40,000 retail touch points. It also has 29 stock points, including its own depots and C&F agents who work on a hub-and-spoke distribution model.
26 February 2014
41
Management: An overview of PIs board of directors is given below: Figure 63: PI board of directors
Salil Singhal Mayank Singhal Rajnish Sarna P.N. Shah Raj Kaul Narayan K. Seshadri Bimal Kishore Raizada Pravin K. Laheri Ramni Nirula Anurag Surana Venkatrao S. Sohoni
Source: Company
Chairman and Managing Director Managing Director and CEO Executive Director Director Director Director Director Director Director Director Additional Director
Financials
We present below key assumptions used to project PIs financials. Revenue: We project an FY13-16E revenue CAGR of 30%. This is driven by a 41% revenue CAGR in the CSM business and a 15% CAGR in the domestic pesticide business. Its strong order book, at 2.4x FY14E CSM revenue (excluding short-term orders) provides visibility on CSM revenue growth. Management indicates it also has a pipeline of one to two more products in the domestic business for FY15 and three new molecules are near commercialisation in the CSM business. Figure 64: PI revenue and revenue CAGR, FY11-16E
30,000 25,000 20,000 15,000 10,000 5,000 0 FY11 FY12 FY13 FY14E FY15E FY16E
CSM revenue
Domestic revenue
Margins: We expect EBITDA margin to remain around 19% over the forecast period. While PI recorded a material improvement in margins in 9M FY14 owing to operating leverage, we have not assumed any improvement in margins going forward. As per the company, margins in the CSM business are 200-300bps higher than those in its domestic business. An increasing proportion of CSM business could therefore lead to profitability and higher margins above our assumptions.
26 February 2014 42
INR mn
CAGR 29%
Figure 65: PI EBITDA and EBITDA margins

6,000 5,000 14% 4,000 INR mn 3,000 8% 2,000 1,000 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
EBITDA
EBITDA margin (%) 19% 19% 17%
19%
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Margin (%)
16%
16%
16%
EPS growth: Given our revenue and margin projections, we estimate EPS to rise from INR 7.65 in FY13E to 21.45 in FY16E, implying a CAGR of 41%. We also expect RoE to improve from 23% in FY13E to 29% over FY14-16E. Figure 66: EPS
25 EPS
20
Per share
15
CAGR 49%
10
0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

26 February 2014
43

Year-end: Mar Sales Gross profit SG&A Other income Other expenses EBIT Net interest Associates Other non-operational Exceptional items Pre-tax profit Taxation Minority interests Exceptional items after tax Net profit Net profit adj. EBITDA EPS (INR) EPS adj. (INR) DPS (INR) Avg fully diluted shares (mn) 2012 8,791 3,868 (719) 10 (1,843) 1,315 (157) (45) 1,113 (398) 321 1,036 1,036 1,488 8.30 8.24 1.00 126 2013 11,514 4,769 (886) 20 (2,294) 1,609 (155) (3) 1,450 (477) 0 973 973 1,829 7.65 7.59 1.00 128 2014E 16,234 6,656 (1,055) 30 (2,917) 2,714 (64) 0 2,649 (874) 0 1,775 1,775 3,033 12.93 12.83 1.50 138 2015E 20,559 8,429 (1,336) 30 (3,673) 3,450 (35) 0 3,414 (1,127) 0 2,288 2,288 3,833 16.67 16.54 2.00 138 2016E 25,370 10,402 (1,649) 30 (4,387) 4,395 (2) 0 4,393 (1,450) 0 2,944 2,944 4,850 21.45 21.28 2.50 138

Year-end: Mar EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions & Investments Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2012 1,315 173 (157) (398) (281) 276 928 (1,015) 13 (1,001) (125) 206 85 0 166 92 (87) 2013 1,609 220 (155) (477) (374) (3) 819 (1,809) 275 (1,534) (135) 1,225 (296) 0 794 79 (990) 2014E 2,714 320 (64) (874) 30 0 2,125 (1,000) 0 (1,000) (241) 2 (800) 0 (1,039) 86 1,125 2015E 3,450 384 (35) (1,127) (996) 0 1,675 (1,500) 0 (1,500) (321) 0 0 0 (321) (146) 175 2016E 4,395 455 (2) (1,450) (1,009) 0 2,389 (1,500) 0 (1,500) (401) 0 0 0 (401) 488 889

Year-end: Mar Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long-term assets Total long-term assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible bonds Deferred tax Other long-term liabilities Total long-term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year-end shares (mn) 2012 94 1,722 1,788 407 4,011 3,735 50 214 3,999 8,010 1,277 958 877 3,112 1,191 329 124 1,643 4,756 3,254 8,010 2,374 125 2013 161 2,625 2,417 642 5,846 5,311 74 115 5,501 11,347 1,321 2,396 833 4,549 851 483 147 1,481 6,030 5,317 11,347 2,011 135 2014E 247 3,558 2,669 751 7,225 5,992 74 115 6,181 13,406 721 3,336 1,216 5,272 651 483 147 1,281 6,553 6,853 13,406 1,125 137 2015E 101 4,506 3,492 940 9,040 7,108 74 115 7,298 16,337 721 4,224 1,292 6,237 651 483 147 1,281 7,518 8,820 16,337 1,271 137 2016E 589 5,561 4,309 1,151 11,610 8,153 74 115 8,342 19,953 721 5,213 1,377 7,311 651 483 147 1,281 8,591 11,362 19,953 783 137

Year-end: Mar Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj. (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op. cash/EBIT (x) Depreciation/capex (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj. (x) PBR (x) Dividend yield (%) 2012 44.0 16.9 15.0 11.8 35.8 22.1 59.1 42.1 57.8 150.0 2013 41.4 15.9 14.0 8.5 32.9 31.0 -6.0 -7.8 -7.8 0.0 2014E 41.0 18.7 16.7 10.9 33.0 41.0 82.4 69.0 69.0 50.0 2015E 41.0 18.6 16.8 11.1 33.0 26.6 28.9 28.9 28.9 33.3 2016E 41.0 19.1 17.3 11.6 33.0 23.4 28.7 28.7 28.7 25.0
38.4 32.6 1.2 0.7 0.2 118.5 72.1 74.8
22.7 27.5 1.2 0.5 0.1 113.8 68.9 90.8
29.2 36.3 1.3 0.8 0.3 96.9 69.5 109.2
29.2 37.8 1.4 0.5 0.3 92.7 71.6 113.7
29.2 38.7 1.4 0.5 0.3 95.1 72.4 115.1
6.6 1.3
7.4 1.3
19.1 1.4
27.9 1.4
35.6 1.6
1.6 9.6 10.9 11.5 11.6 4.1 1.0
1.4 8.8 10.0 14.3 14.4 3.2 0.9
2.2 11.8 13.2 19.6 19.7 5.1 0.6
1.8 9.4 10.4 15.2 15.3 3.9 0.8
1.4 7.3 8.1 11.8 11.9 3.1 1.0
26 February 2014
44
Kaveri Seed
Sprouting up
Kaveri Seeds (KSL) is the only listed pure play in the Indian OUTPERFORM (initiating coverage) seed industry and one of the largest players in hybrid PRICE as of 25 Feb 2014 PRICE TARGET cotton seeds. KSL has a high RoE business model, with the strongest balance sheet in our agro-inputs coverage universe. Any potential approval for genetically modified seeds could provide room for a structural re-rating in the seed space and we believe KSL would be a key beneficiary. We initiate coverage of KSL with an Outperform rating, based on a March 2015 price target of INR 600. Only listed pure play in the Indian seed industry. KSL is the only listed pure play in the Indian seeds markets and is the second largest player in the hybrid cotton seed market. In addition, KSL has exposure to multiple other hybrid seeds markets including maize and rice. KSL is among the fastest growing companies in our agro-inputs coverage universe with a FY13-16E EPS CAGR of 35%. High RoE model with no leverage. KSL has a strong, net cash balance sheet with a high RoE business model. We estimate KSLs RoE at 48% for FY14E and expect it to remain high at 39% in FY16E (lower RoE being driven by higher cash balance). We believe that such a strong RoE model can command superior multiples for a sustained period of time. Upside potential from the introduction of genetically modified seeds. We have not assumed the introduction of genetically modified (GM) seeds in crops other than cotton in our forecasts. That said, we believe KSL stands to gain in the event that the government permits the use of GM seeds in crops other than cotton, providing visibility on the companys long-term growth. Initiate with Outperform. We initiate coverage of KSL with an Outperform rating and a March 2015 price target of INR 600 per share based on a one-year forward PER of 13x. Risks. Some of the key risks for KSL are (1) adverse weather conditions, (2) increased competition, (3) product concentration, and (4) irrational use of cash.
INR 513.00
Bloomberg code
INR 600.00
KVRI.BO
KSCL IN
Market cap

INR 219.98 - 558.00
2013 7,120 1,393 1,271 1,319 1,267 592 18.43 3.20 50.33 99.2 300.0 19.6 17.8 17.8 17.1 43.7 42.6 1.8 9.1 4.8 11.0 1.6
2014E 9,956 2,153 1,992 2,088 2,026 1,118 29.57 5.91 72.98 60.4 84.8 21.6 20.0 20.3 20.0 48.0 46.7 3.3 15.4 7.0 17.3 1.2
2015E 12,390 2,858 2,668 2,822 2,596 2,053 37.90 7.58 102.01 28.2 28.2 23.1 21.5 21.0 20.0 43.3 44.2 2.6 11.1 5.0 13.5 1.5
2016E 14,991 3,511 3,288 3,534 3,181 2,647 46.43 9.29 137.58 22.5 22.5 23.4 21.9 21.2 20.0 38.8 39.8 2.0 8.5 3.7 11.0 1.8

Kaveri Seed 600 400 200 Feb-13 BSE SENSEX 30 INDEX (rebased)
May-13
Aug-13
Nov-13
Feb-14
-1 mth -3 mth -12 mth 26 62 89 28 60 75 G V Bhaskar Rao (25.1%) 36% 746,780
Sumit Choudhary
26 February 2014
KSC L IN INR 513.00 INR 600.00
45
Investment thesis
Only listed pure play on the Indian seed market KSL is the only listed pure play in the Indian seed market and we believe the company is well positioned for growth given the recent success of its hybrid seeds. We understand that KSL is the second largest player in the hybrid cotton seed market over the past couple of years following a successful product launch and brand promotion campaign by the company. Figure 67: KSL Cotton seeds sales growth
10,000 9,000 8,000 7,000 INR mn 6,000 5,000 4,000 3,000 2,000 1,000 0 FY12 FY13 FY14E FY15E FY16E
Cotton seed sales
CAGR 47%
High RoE generating model with no leverage KSL has a strong balance sheet with a net cash balance sheet of INR 1.4bn as of March 2013. In addition, the company has a strong RoE model with FY13 RoE of 43%. While we forecast RoEs to decline to 39% by FY16E, most of the decline is owing to a higher amount of cash on books. We believe such a strong RoE model can command superior multiples for a sustained period of time. Figure 68: KSL RoE and cash as a % of net worth
70% 60% 50% 40% 30% 20% 10% 0% FY12 FY13 FY14E FY15E FY16E
RoE
Cash as % of networth 58%
50% 43% 42% 29%
50% 48% 43% 42% 39%
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One of the largest germplasm banks in India KSL management believes the company has one of the largest germplasm banks in India. It has over 600 acres of dedicated research farms set up in areas with varying agro-climatic conditions. In addition, the company has around 57 research trial centres across key locations in India. The company has a track record of 169 filings with the Protection of Plant Variety and Farmers Rights Authority (PPVFRA). Figure 69: KSLs research filings
No. of PPVFRA filings Distinctiveness, Uniformity & Stability (DUS) test cleared Registrations
169 48 14
GM seeds could provide strong growth visibility We believe KSLs current valuations do not capture the upside potential in the event that the government permits GM seeds for crops other than cotton. We believe that any such move by the government could be a significant positive for KSL and will provide visibility on the companys long -term growth. We have not built in the approval of GM seeds in non-cotton crops into our forecasts.
Valuation
We value KSL on a 12-month forward PER of 13x to arrive at our March 2015 valuation of INR 600 per share. While a multiple of 13x is higher than the historical PE range for KSL, we believe this is sustainable, given our expectation of 35% EPS CAGR between FY13-16E and consistent 40% RoE delivered by KSL. Figure 70: KSL Historical PER band
16 14 12 PER multiple 10 8 6 4 2 0 Jan-09 Kaveri Seeds forward PER Target PER 13x Average +1 SD -1 SD
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Our PER based valuation is in line with our 12-month forward DCF valuation for KSL.
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Figure 71: KSL DCF valuation

INR mn Oper. EBIT (Less) Taxes Net int. income/(exp) Marginal Tax Rate Tax shield adjustments NOPAT (Add) Depreciation and amortisation (Less) Capex (Less) Working Capital Other adjustments Free Cash Flows NPV (Explicit FCFs) NPV (Terminal Value) Firm value (Less) net debt/ (cash) Equity value Equity value/share
Source: Bloomberg, Standard Chartered Research estimates
FY14E 1,992 -63 0 -3% 0 1,929 161 -300 -769 1,021 13,484 22,204 35,688 -5,394 41,081 600
FY15E 2,668 -226 0 -8% 0 2,443 190 -400 -333 1,899
FY16E 3,288 -353 0 -10% 0 2,935 223 -400 -356 2,401
FY17E 3,805 -625 0 -15% 0 3,180 256 -400 -311 2,725
FY18E 4,408 -980 0 -20% 0 3,428 289 -400 -358 2,958
FY19E 5,019 -1,415 0 -25% 0 3,605 322 -400 -360 3,167
FY20E 5,720 -1,762 0 -27% 0 3,959 355 -400 -407 3,506 4.5% 13.5%
FY21E 6,523 -2,254 0 -30% 0 4,269 388 -400 -462 3,795
FY22E 7,441 -2,850 0 -33% 0 4,591 421 -400 -523 4,088
Terminal growth rate (%) WACC (%)
Risks
Some of the key risks to our thesis on KSL are as follows: Adverse weather: In addition to adverse weather impacting demand, there is a risk of seed supplies (raw material) for KSL being impacted by unforeseen weather conditions. While the company maintains some inventory of its seeds, a severe weather condition can have a material impact on KSLs profitability, in our view. Increase in competition: While KSL has generated strong growth in the past and maintained its margins, any innovation-driven increase in competitive intensity can adversely affect revenue growth and margins in the future. In addition, any retaliation from incumbent players in the cotton hybrid seeds business can adversely affect KSLs margins and profitability. Product concentration: KSL has a high level of product concentration, with cotton seeds comprising c.60% of its seed sales. Within cotton seeds, Andhra Pradesh is the biggest market for KSL, increasing the geographic concentration risk for the company. Irrational use of cash: While KSL management has been conservative with its use of cash so far, we would like to see an explicit strategy for the use of the incremental cash by the company. Any irrational use of cash could be a threat to our investment thesis.
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Background. KSL is the largest listed seeds company in India. The company was set up in 1976 as a proprietorship by first generation entrepreneur, G V Bhaskar Rao. Subsequently, the company was incorporated in 1986 and listed in 2007. In addition to hybrid seeds, the company is involved in nascent micronutrients and bio-products businesses. Research-driven approach. The company has a research-driven approach to launching new and innovative hybrid varieties in the market. The companys R&D comprises of a bio-technology lab, a modern seed-testing lab and a company owned central research farm for generation and evaluation of breeding material. In addition the company has satellite farms for crop specific research, breeder seed production and related functions. The R&D division of KSL is recognised by the Department of Scientific and Industrial Research (DSIR). The company claims to have one of the largest germplasm banks in the country. Product portfolio. KSL has 169 applications with the PPVFRA, the authority for approving new varieties of seeds in India. The company operates across multiple plant varieties in the seeds segment. A brief overview of KSL s product portfolio is given below: Figure 72: KSL Product portfolio
Seeds Food crops: Cotton, corn, rice, bajra, jowar, sunflower Micro nutrients Foliar spray and soil application formulations, plant growth promoters, biopesticides Exotic vegetables Vegetables: Green capsicum, red/ yellow bell peppers, hybrid tomato, cherry tomato, parthenocarpic cucumber Herbs: Chives, sage, cilantro, parsley
Vegetables: Tomato, okra, chilly, gourds

Within the seeds portfolio, cotton is the predominant segment for KSL and comprised c.60% of the companys seed sales in FY13. It may be worth noting that growth in cotton seeds is a relatively nascent phenomena for the company and in FY11, the cotton division comprised c.40% of the companys seed sales. Since then, overall sales for the company have trebled, with cotton seeds being the biggest driver. Figure 73: KSL Seed sales breakdown
8,000 7,000 6,000 5,000 INR mn 4,000 3,000 2,000 1,000 0 FY11
Cotton seeds Bajra
Maize Sunflower
Rice Hybrid Other seeds
FY12
FY13
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Microteck and KexVeg. The Microteck division of the company produces micronutrient mixtures, organic products and bio-pesticides. We believe this division can deliver strong growth in the coming years, given poor soil conditions in the country and the potential for higher application of green agriculture inputs in the country. The KexVeg subsidiary of KSL is focused on producing high-value exotic vegetables and herbs. KexVeg has started commercial cultivation of high-value exotic Indian vegetables and European herbs in an exploratory built-up area of 5ha of mega green houses. The company plans to increase this business multi-fold over the next few years. Management: A brief profile of KSLs management is given below: Figure 74: KSL Board of directors
G V Bhaskar Rao G Vanaja Devi R Venu Manohar Rao C Vamsheedhar C Mithun Chand G Pawan Yeshwant Laxman Nene M Srikanth Reddy S Raghuvardhan Reddy S M Ilyas P Vara Prasad Rao K Purushotham
Source: Company
Chairman and Managing Director Wholetime Director Wholetime Director Wholetime Director Wholetime Director Director Director Director Director Director Director Director
Financials
We present below the key assumptions used to project KSLs financials. Revenues: We forecast KSLs seed division sales to grow at a CAGR of 23% between FY14-16E. While the cotton seeds business has seen a strong CAGR of c.90% between FY11-14E, we have assumed a growth rate of 22% p.a. between FY14-16E for cotton seed sales. We assume a lower growth rate versus history owing to our assumption of lower market share gains going forward versus what KSL has achieved in the past. The second largest category for the company is maize where we have assumed a 25% CAGR over FY14-16E versus a 36% CAGR expected to be achieved over FY11-14E. We have assumed that the micronutrients business will grow at a CAGR of 20% over FY14-16E. As a result of our assumptions above, we expect KSLs overall revenues to grow to INR 15.0bn in FY16E from INR 10.0bn in FY14E.
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Figure 75: KSL Revenue growth

16,000 14,000 12,000 INR mn 10,000 8,000 6,000 4,000 2,000 0 FY11 FY12 FY13 FY14E FY15E FY16E
Consolidated revenue
CAGR 45%
Margins: The biggest cost for KSL (44% of revenues in FY13) is the cost of materials. This cost comprises the cost of breeding seeds. Selling and distribution expenses are the other significant cost for KSL, at 20% of revenues for FY13. In addition, KSL also paid royalty amounting to c.11% of seed sales in FY13. KSL earned an EBITDA margin of 20% in FY13 and we expect margins to improve to 22% by FY14E owing to operating leverage. Figure 76: KSL EBITDA and EBITDA margins
4,000 3,500 3,000 2,500 INR mn 2,000 1,500 1,000 500 0 FY11 FY12 FY13 FY14E FY15E FY16E
EBITDA 23%
EBITDA margin 23%
23%
24% 23%
22% 21% 20%
22% 21% 20% 19% 18% 17% Margin
EPS growth: As a consequence of our revenue and margin projections provided above, we believe KSLs EPS will increase from INR 18 in FY13 to 46 by FY16E, implying a 35% CAGR over the three-year period. We expect KSLs RoEs to decline to 39% by FY16E from 43% in FY13. However, most of the decline is attributable to accumulation of cash on the balance sheet.
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Figure 77: KSL EPS growth

50 45 40 35 Per share 30 Growth 25 20 15 10 5 0 FY11 FY12 FY13 FY14E FY15E FY16E
EPS 100%
EPS growth
120% 100% 80% 60% 40% 23% 20% 0%
46%
49%
60% 28%
Leverage and working capital: KSL has a strong balance sheet with net cash of INR 1.4bn in FY13. We expect the net cash balance to increase to INR 5.4bn by FY16E. Overall net working capital days for KSL have increased to 31 days in FY13 from 18 in FY12. We have assumed net working capital at 50 days of sales for FY1416E.
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Year-end: Mar Sales Gross profit SG&A Other income Other expenses EBIT Net interest Associates Other non-operational Exceptional items Pre-tax profit Taxation Minority interests Net profit Net profit adj. EBITDA EPS (INR) EPS adj. (INR) DPS (INR) Avg fully diluted shares (mn) 2012 3,724 2,315 (257) (1,389) 670 (7) (53) 610 (29) 581 634 770 8.48 9.25 0.80 69 2013 7,120 3,966 (325) (2,370) 1,271 34 13 1,319 (38) 1,281 1,267 1,393 18.69 18.43 3.20 69 2014E 9,956 6,272 (559) (3,721) 1,992 96 0 2,088 (63) 2,026 2,026 2,153 29.57 29.57 5.91 69 2015E 12,390 7,806 (685) (4,452) 2,668 154 0 2,822 (226) 2,596 2,596 2,858 37.90 37.90 7.58 69 2016E 14,991 9,444 (822) (5,334) 3,288 246 0 3,534 (353) 3,181 3,181 3,511 46.43 46.43 9.29 69

Year-end: Mar EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions & Investments Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2012 670 100 (7) (29) 401 (53) 1,082 (51) (107) (158) (55) (7) (61) 0 (123) 801 1,031 2013 1,271 122 34 (38) (317) 13 1,086 (494) 82 (412) (219) (27) (187) 0 (433) 241 592 2014E 1,992 161 96 (63) (769) 0 1,418 (300) 0 (300) (474) 0 0 0 (474) 644 1,118 2015E 2,668 190 154 (226) (333) 0 2,453 (400) 0 (400) (608) 0 0 0 (608) 1,445 2,053 2016E 3,288 223 246 (353) (356) 0 3,047 (400) 0 (400) (744) 0 0 0 (744) 1,903 2,647

Year-end: Mar Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long-term assets Total long-term assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible bonds Deferred tax Other long-term liabilities Total long-term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year-end shares (mn) 2012 96 1,106 285 3,033 140 4,661 1,066 7 151 1,225 5,886 192 1,100 2,125 3,417 26 0 29 55 3,472 2,414 5,886 (984) 69 2013 143 1,290 686 4,912 113 7,143 1,445 11 77 1,533 8,676 23 2,486 2,674 5,182 8 0 37 45 5,227 3,448 8,676 (1,402) 69 2014E 786 1,290 1,637 5,455 113 9,281 1,584 11 77 1,672 10,953 23 3,273 2,612 5,908 8 0 37 45 5,953 5,000 10,953 (2,046) 69 2015E 2,232 1,290 2,037 6,789 113 12,460 1,794 11 77 1,882 14,342 23 4,073 3,212 7,308 8 0 37 45 7,353 6,989 14,342 (3,491) 69 2016E 4,134 1,290 2,464 8,214 113 16,216 1,971 11 77 2,059 18,275 23 4,928 3,853 8,804 8 0 37 45 8,849 9,425 18,275 (5,394) 69

Year-end: Mar Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj. (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op. cash/EBIT (x) Depreciation/capex (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj. (x) PBR (x) Dividend yield (%) 2012 62.2 20.7 18.0 17.0 4.7 59.4 36.8 36.8 49.2 60.0 2013 55.7 19.6 17.8 17.8 2.9 91.2 120.4 120.4 99.2 300.0 2014E 63.0 21.6 20.0 20.3 3.0 39.8 58.2 58.2 60.4 84.8 2015E 63.0 23.1 21.5 21.0 8.0 24.4 28.2 28.2 28.2 28.2 2016E 63.0 23.4 21.9 21.2 10.0 21.0 22.5 22.5 22.5 22.5
27.0 30.4 0.8 1.6 2.0 606.5 31.7 192.0
43.7 42.6 1.0 0.9 0.2 459.7 24.9 207.5
48.0 46.7 1.0 0.7 0.5 513.6 42.6 285.3
43.3 44.2 1.0 0.9 0.5 487.5 54.1 292.5
38.8 39.8 0.9 0.9 0.6 493.6 54.8 296.2
20.5 1.4
84.3 1.4
nm 1.6
nm 1.7
nm 1.8
1.5 7.3 8.4 10.6 9.7 3.3 0.9
1.8 9.1 10.0 10.8 11.0 4.8 1.6
3.3 15.4 16.6 17.3 17.3 7.0 1.2
2.6 11.1 11.9 13.5 13.5 5.0 1.5
2.0 8.5 9.0 11.0 11.0 3.7 1.8
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UPL
Cash flow is king
We initiate coverage of UPL with an Outperform rating and a March-2015 price target of INR 235. UPLs recent foray into the high-value Brazilian market provides the company with a strong growth potential. Improvement in margins and stabilisation of working capital should help UPL become FCF positive, in our view. We believe that current valuations do not capture UPLs growth potential.
OUTPERFORM
PRICE as of 25 Feb 2014
(initiating coverage)
PRICE TARGET
INR 185.35
Bloomberg code
INR 235.00
Reuters code
UPLL IN
Market cap
UPLL.BO
12-month range
INR 83,843mn (USD 1,351mn)

INR 111.00 - 217.70
Play on global crop protection industry. UPL is the only listed Indian player to have direct access to all major agro-input markets globally. In addition, we believe its recent foray into the Brazilian market provides a growth opportunity. Stabilising working capital and free cash flow position. Delivery of free cash flow would be key to UPLs re -rating, in our view. We believe that its overall working capital has stabilised and, with a focus on margins, the company should be in a position to reduce its net debt by c.INR 12bn over FY14-16E. Buyback program demonstrates confidence in cash flow. UPL recently completed a buyback of 14mn shares at an average acquisition price of INR 202 per share. We believe that such return of cash demonstrates managements confidence in cash flow. Initiate with Outperform. We initiate coverage of UPL with an Outperform rating and a March-2015 price target of INR 235 per share, based on a 12-month forward EV/EBITDA of 5.5x, which translates into a 12-month forward PER of 9.5x. Risks. Key risks to our thesis, besides delay in free cash flow delivery, include: (1) adverse weather conditions, (2) adverse foreign exchange movement, (3) exposure to Latin America and (4) irrational expansion.
2013 91,945 16,618 13,081 10,151 7,746 6,133 17.12 2.50 104.95 42.3 0.0 18.1 14.2 8.4 14.6 54.4 17.6 16.9 0.9 4.9 1.1 7.2 2.0
2014E 102,733 18,492 14,537 11,477 8,366 2,359 19.52 3.00 119.96 14.0 20.0 18.0 14.1 8.1 15.4 55.6 17.1 17.8 1.1 5.9 1.5 9.5 1.6
2015E 109,484 19,707 15,071 12,519 9,698 6,726 22.63 3.00 139.23 15.9 0.0 18.0 13.8 8.9 13.3 39.8 17.5 18.0 1.0 5.3 1.3 8.2 1.6
2016E 118,906 21,403 16,160 13,900 10,612 7,216 24.76 3.50 159.90 9.4 16.7 18.0 13.6 8.9 14.1 26.9 16.6 17.9 0.8 4.6 1.2 7.5 1.9

UPL 240 170 100 Feb-13 BSE SENSEX 30 INDEX (rebased)
May-13
Aug-13
Nov-13
Feb-14
-1 mth -3 mth -12 mth -9 16 50 -8 15 39 Nerka Chemicals Private Limited (22.3%) 71% 5,473,179
Sumit Choudhary
26 February 2014
UPLL IN INR 185.35 INR 235.00
54
Investment thesis
Play on global crop protection industry According to management, the global market for agrochemical products was valued at USD 47.3bn in 2012, growing 7.4% over 2011. Figure 78: Global crop protection in the agrochemical market
50 45 40 35 USD bn 30 25 20 15 10 5 0 2008 2009 2010 2011 2012
Global crop protection market size 44.0 40.5 37.9 38.3
47.3
UPL is the only listed Indian player to have direct access to all major agro-input markets globally. Some of the companys key markets are given below:
Figure 79: UPLs global presence

Market US India Brazil Europe China Indonesia Japan % of UPL revenues FY13 20% (North America) 19% 27% (Latin America) 18% NA NA NA Market size/UPL market share USD 8.5bn/5% (US only) USD 2bn/17% USD 10bn/3% (Brazil only) USD 12bn/3% USD 3.5bn/1% USD 400mn/4% USD 4bn/1%
In addition, UPL has demonstrated a track record of stronger-than-industry growth rates across key geographies it operates in. Figure 80: UPLs growth vs. market (2010-13 CAGR)
Market North America South America Europe India Rest of the world
Source: Company
Industry CAGR 2010-13 5% 14% 3% 10% 10%
UPL CAGR 2010-13 15% 58% 3% 15% 16%
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Recent foray into Brazil provides growth opportunity Brazil has emerged as one of the largest markets globally for agro-inputs, with an estimated market size of USD 10bn. UPL forayed into this market through the acquisition of DVA, a local player in the pesticides market, in FY12. We expect Latin America to be one of the fastest-growing markets for UPL, driven by faster growth in Brazil, as the company improves its penetration and supplier reach in the market. Figure 81: UPLs Latin America revenue growth
40,000 35,000 30,000 25,000 INR mn 20,000 15,000 10,000 5,000 0 FY12 FY13 FY14E FY15E FY16E
Latin America revenue 28%
Growth (%)
30% 25% 20% Growth
15% 10%
15%
15% 10% 5% 0%
Stabilising working capital and improved cash flows to drive performance We believe managements recent focus on margin expansion will help improve RoEs. In addition, we believe UPLs overall working capital levels, after having risen to 134 days in FY12 from 83 days in FY10, have now stabilised at 110 days and are unlikely to deteriorate materially from here. Figure 82: UPLs working capital days and EBITDA margins
160 140 120 100 Days 80 60 40 20 0 FY10 FY11 -17,978 FY12 FY13 FY14E FY15E FY16E -2,926 14,224 6,722 2,359 6,726 7,216 Net working capital days FCF* 20,000 15,000 10,000 5,000 0 -5,000 -10,000 -15,000 -20,000 FCF (INR mn)
* FCF defined as cash flow from operations investing cash flows Source: Company, Standard Chartered Research estimates
Due to improving cash flows, we believe that UPL will be able to reduce its net debt to c.INR 16bn by FY16E from INR 28bn in FY14E, thus lowering its net debt/EBITDA ratio to 0.8x by FY16E from 1.5x in FY14E.
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Figure 83: UPLs net debt and net debt/EBITDA ratio

30,000 25,000 20,000 INR mn 15,000 0.9x 10,000 5,000 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Net debt 1.8x 1.5x
Net debt / EBITDA
2.0x 1.8x
1.5x 1.4x
1.6x 1.4x 1.1x 0.8x 1.2x 1.0x 0.8x Multiple
0.6x 0.3x
0.6x 0.4x 0.2x 0.0x
Buyback demonstrates confidence in cash flow We believe UPLs recently concluded buyback of 14mn shares for INR 2.8bn demonstrates managements confidence in the companys cash flow. We believe a sustained delivery of cash flow and stable/improving margins will be key to a re-rating of the stock going forward.
Valuation
We value UPL on a 12-month forward EV/EBITDA of 5.5x to arrive at our March2015 price target of INR 235 per share. Our valuation translates into a 12-month forward PER of 9.5x. Our target PER is in line with the forward PERs of listed global generic companies, such as Nufarm and Auriga (Cheminova), and is in-line with UPLs historical trading band. Figure 84: UPLs historical PER chart
20 18 16 14 PER multiple 12 10 8 6 4 2 0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Target PER 9.55x UPL forward PER Average +1 SD -1 SD
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Figure 85: International comps

Price Ticker NUF AU AURIB DC Median
Note: Share price data as of 25 February 2014. Source: Bloomberg.
Market cap (USD mn) 924 844
PER (x) CY14E 10.2 10.2 10.2 CY15E 8.9 8.5 8.7
EV/EBITDA (x) CY14E 6.4 6.5 6.4 5.9 5.7 5.8
Div yield 2.2 2.0 2.1
ROCE 10.8 14.5 12.6
Name Nufarm Ltd/Australia Auriga Industries
(LCY) 3.9 179.5
CY15E CY13E (%) CY12 (%)
Risks
Key risks to our investment view, besides a delay in delivery of free cash flow, arise from the following: Adverse weather: Like all agriculture businesses, UPL is also exposed to significant swings in global weather conditions. However, given its wide geographical spread, the company is somewhat insulated from isolated weather-related disruptions. That said, its exposure to such widespread geographies and markets also makes forecasting inherently difficult for a company like UPL. Adverse foreign exchange movements: UPL could be severely impacted by adverse foreign exchange movements, especially a sharp appreciation in the rupee, given its reporting currency is INR while the company operates in a multitude of foreign currencies. Latin American exposure: UPL derives 27% of its revenues from Latin America, with a majority coming from Brazil. While management is relatively comfortable with this exposure, any significant macroeconomic stress including capital controls in the Latin American economies could have a negative impact on UPL. Irrational expansion: UPL has been following an acquisition-driven model, and any irrational and sizeable acquisition could dent our investment thesis.
UPL manufactures agrochemicals and industrial chemicals. The company has 23 manufacturing units globally. UPL started business in India as a red phosphate manufacturer, but diversified into the global arena in 1993 with its first acquisition. Since then, the company has systematically grown its footprint through organic and inorganic means, having made 19 large and small acquisitions over the past two decades. Business segments: UPLs business activity can be split into two categories: Agro inputs: This segment constitutes more than 90% of revenues and has the following sub-divisions. Crop protection: This division manufactures and markets pre-harvest and postharvest agrochemicals. Aside from insecticides, herbicides and fungicides, the company also offers the following products in the crop protection space. DECCO: DECCO stands for Decay Control chemicals and consists of high-quality coatings for fruits and vegetables. The DECCO film coating provides long-lasting shine and controls shrinkage and dehydration, thereby making transportation easier for longer periods of time. According to management, all the ingredients used in
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manufacturing DECCO are approved as food grade materials by the Food and Drug Administration, the EU and the Prevention of Food Adulteration Authority (in India). Grain fumigants: This is UPLs post-harvest solution, where fumigants are used to enhance efficiency of stored foodgrains. The product offered in this segment includes QuickPhos. Seeds: UPL offers seeds through its listed associate company (49.81%-owned), Advanta Seeds. Advanta is an Indian plant genetics company with a global presence. The company is present in Asia, Africa, Australia, South America, North America and Europe. Advanta is a world leader in sorghum (grain, forages and sweet) and has a strong position in tropical corn, sunflower, canola, sweet corn and vegetables. The associate company is currently embarking upon a growth strategy in the emerging markets of Africa, Asia and Latin America. Non-agro inputs: This division constituted less than 10% of total revenues for UPL in FY13. Through this division, UPL manufactures and markets caustic chlorine, white phosphorus, industrial chemicals and specialty chemicals. Acquisition-driven model: UPL has made 19 acquisitions in the past two decades. Management prides itself in buying assets below replacement cost and in its ability to turn around acquired companies. Two companies that were loss-making at the time of acquisition have both turned profitable within 18 months to three years of acquisition. However, one drawback of such an acquisition-driven strategy is that it makes assessment of organic growth difficult. Geographical spread: The key geographies in which UPL operates are enumerated below: India: The Indian market constituted 19% of UPLs revenues in FY13 and is one of its oldest markets. The company enjoyed a 17% market share in India in FY13 and is the largest domestic player. UPL has more than 50 product registrations in India, with some key brands being Lancer Gold, Ulala, Saaf, Saathi and Lagaam. North America: North America accounted for 20% of UPLs FY13 revenues. The company had a 5% market share in FY13 in the US. Some of its key brands are Manzate, Aquathol, Microthial, Sur Flan, Asulam, Ultra Blazer and Tricor. Europe: Europe constituted 18% of UPLs FY13 revenues. The company had a 3% market share in Europe in FY13. UPL has four manufacturing units in France and is also present through subsidiaries. Some of its brands in Europe include Beet Up and Napropamide. Latin America: Latin America accounted for 27% of UPLs FY13 revenues. This market gained significance for the company after its recent entry into Brazil through the acquisition of DVA and Sipam Isagro. UPL had a 3% share in the USD 10bn Brazilian market in FY13 and management is targeting high growth in this market by pushing some of its existing brands and pursuing more aggressive marketing strategies. Rest of the world: RoW constituted 14% of UPLs FY13 revenues and includes markets such as Australia, China, Japan and Indonesia.
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Management: An overview of UPLs management is given below: Figure 86: UPL Board of directors
R D Shroff S R Shroff J R Shroff V R Shroff A C Ashar P V Krishna Pradeep Goyal K Banerjee Reena Ramachandran Pradip Madhavji Vinod Sethi Suresh P Prabhu
Source: Company
Promoter & Executive Chairman and Managing Director Promoter and Non-Executive Vice Chairman Promoter and Non-Executive Director Promoter and Non-Executive Director Non-Promoter and Executive Director Independent and Non-Executive Director Independent and Non-Executive Director Non-Promoter Executive Director Independent and Non-Executive Director Independent and Non-Executive Director Independent and Non-Executive Director Independent and Non-Executive Director
Financials
We present below some of the key assumptions while projecting UPLs financials. Revenues: Projecting overall revenue growth is inherently difficult, given UPLs acquisitive nature and its multiple products over diverse geographies at varying growth rates. We summarise our assumptions for various geographies in which UPL operates as follows: India: We project UPLs revenues for the India business to grow at a CAGR of 14% over FY13-16E. This compares with the 17% CAGR achieved over FY08-13. Our projections for Indias growth are largely in line with our market growth expectations. North America: We project revenues for the North American business to grow at a CAGR of 3.3% over FY13-16E. This compares with the 15% CAGR achieved over FY08-13. Our revenue growth projections are based on an assumption of USD-INR at 60.5 for FY14 and 62 through the FY15-16 forecast period. Europe: We project revenues for the European business to grow at a CAGR of 6.4% over FY13-16E. This compares with more than 8% CAGR achieved over FY08-13. Our revenue growth projections are based on an assumption of EUR-INR at 81 for FY14 and 84 through the FY15-16 forecast period. Latin America: We project revenues for the Latin American business to grow at a CAGR of 13% over FY13-16E. This compares with the 15% growth rate expected for FY14E. The growth will primarily be driven by the Brazilian market, in our view. RoW: We project revenues for the RoW business to grow at a CAGR of 3.2% over FY13-16E. This compares with c.8.4% CAGR achieved over FY08-13.
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Figure 87: UPLs revenue growth split across geographies

140,000 120,000 100,000 INR mn 80,000 60,000 40,000 20,000 0 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
India revenue Europe revenue RoW revenue 30%
North America revenue Lat Am revenue Revenue growth (%)
35% 30% 25% Growth 20%
20% 10% 7% 12% 7% 9%
15% 10% 5% 0%
Margins: UPLs EBITDA margin has been stable at c.18% over FY10 -13. We project its EBITDA margin to remain at 18% through our FY14-16 forecast period. Figure 88: EBITDA (INR mn) and EBITDA margin (%)
25,000 18.2% 20,000 15,000 INR mn 18.0% 10,000 5,000 0 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
EBITDA
EBITDA margin (%)
18.3% 18.2%
18.1% 18.1% 18.0% 18.0%
18.2% 18.1% 18.1% 18.0% 18.0% 17.9% EBITDA margin
18.0%
EPS growth: Given our aforementioned revenue and margin projections, we expect UPLs EPS to increase to INR 24.76 by FY16E from INR 17.12 in FY13, implying a CAGR of 13% over the period. We also expect its RoE to sustain around 17% levels over our forecast period. Figure 89: EPS (INR) and EPS growth (%)
30 25 20 EPS 42% 40% 30% 15% 9% 14% 16% 9% 20% 10% 0% -3% FY10 FY11 FY12 FY13 FY14E FY15E FY16E -10% Growth EPS growth 50%
Per share
26 February 2014
15 10 5 0
61
Leverage and working capital: UPL had a net debt of INR 22bn in FY13, implying a net-debt-to-EBITDA ratio of 1.4x. We expect net debt to rise to INR 28bn in FY14 with a net-debt-to-EBITDA ratio of 1.5x. We note that a large part of the increase in its net debt position is attributable to foreign exchange movements (INR 1.5bn) and buyback (INR 2.8bn). In addition, we expect the net working capital days to increase to 110 in FY14 from 105 in FY13, leading to an impact in the net debt position. We expect net working capital days to remain at 110 days. We note that UPL has a high cash balance of INR 19.4bn as of FY13 versus gross debt of INR 42bn. While we understand that some of this cash is required, given its operations are spread across more than 50 operating companies across nations, we would like to see UPL use some of its cash to pay down debt. We note that the company has repaid some of its gross debt (INR 5.2bn reduction despite FX revaluation loss) in YTD FY14 and has also undertaken an initiative to return some of the cash to shareholders through the recently concluded buyback.
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Year-end: Mar Sales Gross profit SG&A Other income Other expenses EBIT Net interest Associates Other non-operational Exceptional items Pre-tax profit Taxation Minority interests Exceptional items after tax Net profit Net profit adj. EBITDA EPS (INR) EPS adj. (INR) DPS (INR) Avg fully diluted shares (mn) 2012 2013 2014E 2015E 2016E 76,713 91,945 102,733 109,484 118,906 36,133 45,072 51,366 54,742 59,453 (17,237) (21,084) (23,475) (25,438) (27,836) (7,980) (10,906) (13,355) (14,233) (15,458) 10,916 13,081 14,537 15,071 16,160 (3,223) (3,290) (3,409) (2,902) (2,610) (351) 360 350 350 350 7,342 10,151 11,477 12,519 13,900 (1,280) (2,032) (2,615) (2,921) (3,387) (54) 16 100 100 100 (453) (389) (596) 0 0 5,556 7,746 8,366 9,698 10,612 5,556 13,840 12.03 12.03 2.50 462 7,746 16,618 17.12 17.12 2.50 452 8,366 18,492 19.52 19.52 3.00 429 9,698 19,707 22.63 22.63 3.00 429 10,612 21,403 24.76 24.76 3.50 429

Year-end: Mar EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions & Investments Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2012 10,916 2,924 (3,223) (1,280) (13,120) (858) (4,640) (13,113) (225) (13,338) (1,155) 70 7,104 2,319 8,339 (9,639) (17,753) 2013 13,081 3,537 (3,290) (2,032) 155 (13) 11,438 (5,305) 589 (4,716) 2014E 14,537 3,955 (3,409) (2,615) (5,463) (146) 6,859 (4,500) 0 (4,500) 2015E 15,071 4,636 (2,902) (2,921) (2,608) 450 11,726 (5,000) 0 (5,000) (1,504) 0 (3,000) 100 (4,404) 2,322 22 6,726 2016E 16,160 5,243 (2,610) (3,387) (3,640) 450 12,216 (5,000) 0 (5,000) (1,755) 0 (2,000) 100 (3,655) 3,561 0 7,216
(1,323) (1,504) (2,162) (2,826) 8,142 (8,000) (157) 100 4,500 (12,230) 11,222 6,133 (9,871) 892 2,359

Year-end: Mar Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long-term assets Total long-term assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible bonds Deferred tax Other long-term liabilities Total long-term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year-end shares (mn) 2012 7,002 1,250 24,453 18,779 6,017 57,500 13,951 21,335 10,903 46,189 2013 15,482 2,837 26,850 20,687 8,519 74,375 15,668 23,000 11,487 50,156 2014E 6,503 2,837 29,553 29,553 9,382 77,829 17,933 23,736 11,487 53,156 2015E 8,847 2,837 31,495 31,495 9,956 84,631 18,421 23,782 11,487 53,690 2016E 12,409 2,837 34,206 34,206 10,756 94,413 18,177 23,782 11,487 53,447

Year-end: Mar Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj. (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op. cash/EBIT (x) Depreciation/capex (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj. (x) PBR (x) Dividend yield (%) 2012 47.1 18.0 14.2 7.2 17.4 33.2 -0.4 -3.4 -3.4 25.0 2013 49.0 18.1 14.2 8.4 20.0 19.9 39.4 42.3 42.3 0.0 2014E 50.0 18.0 14.1 8.1 22.8 11.7 8.0 14.0 14.0 20.0 2015E 50.0 18.0 13.8 8.9 23.3 6.6 15.9 15.9 15.9 0.0 2016E 50.0 18.0 13.6 8.9 24.4 8.6 9.4 9.4 9.4 16.7
103,689 124,531 130,985 138,321 147,860 10,119 15,035 6,076 31,230 23,772 940 3,517 28,229 59,459 41,731 2,499 44,230 13,910 21,176 6,898 41,983 28,123 1,170 4,459 33,753 75,736 46,452 2,342 48,795 14,711 28,146 6,898 49,755 21,744 1,170 4,459 27,373 77,128 51,414 2,442 53,856 14,762 29,996 6,898 51,655 18,818 1,170 4,459 24,448 76,103 59,676 2,542 62,218 14,762 32,577 6,898 54,237 16,818 1,170 4,459 22,448 76,685 68,533 2,642 71,175
14.1 18.0 0.8 -0.4 0.2 147.7 93.4 117.5
17.6 16.9 0.8 0.9 0.7 153.7 101.8 141.0
17.1 17.8 0.8 0.5 0.9 178.5 100.2 175.2
17.5 18.0 0.8 0.8 0.9 203.5 101.8 193.8
16.6 17.9 0.8 0.8 1.0 201.7 100.8 192.1
60.8 2.6 1.8
54.4 3.0 1.8
55.6 3.1 1.6
39.8 3.6 1.6
26.9 4.1 1.7
103,689 124,531 130,985 138,321 147,860 26,889 462 26,551 443 29,952 429 24,733 429 19,172 429
1.1 6.2 7.9 12.1 12.1 1.4 1.7
0.9 4.9 6.3 7.2 7.2 1.1 2.0
1.1 5.9 7.5 9.5 9.5 1.5 1.6
1.0 5.3 6.9 8.2 8.2 1.3 1.6
0.8 4.6 6.1 7.5 7.5 1.2 1.9
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Coromandel International
Wait for better weather
CRIN is one of the oldest and most renowned fertiliser IN-LINE (initiating coverage) players in India. The company has a growing non-fertiliser PRICE as of 25 Feb 2014 PRICE TARGET portfolio built through organic and in-organic means. We believe it will be a challenge for CRIN to achieve its 50% non-fertilizer EBITDA target organically until at least FY17, unless fertiliser profit falls or gypsum prices surge. CRIN ranks highly in our framework for its farmer-connect initiative. We expect this to boost the companys brand position and growth. We initiate coverage with an In-Line rating as valuation is full, in our opinion. Migration to lucrative segments: CRIN has a mix of fertiliser and non-fertiliser businesses. Owing to high working capital and volatility in the fertiliser business, CRIN management has a stated goal of at least 50% EBITDA contribution from its non-subsidised business in the next few years. However, achieving this target organically could be a challenge until at least FY17, unless fertiliser profitability declines or gypsum profitability rises strongly. Unique farmer-connect initiative: CRINs differentiated strategy hinges on a retail initiative to achieve farmer connect. It has c.650 retail stores and intends to increase the store count to 1,000 in the next few years. Its retail initiative, albeit small at present, could help CRIN push its own products against other branded items, and enhance non-subsidised profitability. Integrated fertiliser business held down by industry concerns: CRINs highly integrated fertiliser business enables it to capture most parts of the fertiliser value chain, but fertilisers are not our preferred investment theme in the Indian agro-inputs industry, given subsidy and policy dependence issues. Valuation is full; initiate with In-Line rating: We view current valuation as fully priced in and thus initiate coverage of the stock with an In-Line rating and a March-2015 price target of INR 215. Key risks: We view the following as key risks to our investment view: (1) any policy changes in the fertiliser business; (2) adverse weather conditions; and (3) irrational expansion.
160 Feb-13
May-13 Aug-13 Nov-13 Feb-14
INR 204.05
Bloomberg code
INR 215.00
Reuters code
CRIN IN
Market cap
CORF.BO
12-month range

INR 14.00 - 268.90
2013 90,337 7,679 6,968 5,567 4,320 231 15.23 4.50 77.60 -32.4 -35.7 8.5 7.7 4.8 29.5 104.7 18.8 20.6 1.0 12.2 2.4 16.7 1.8
2014E 102,623 8,961 7,980 6,150 4,213 3,058 14.70 4.50 88.19 -3.4 0.0 8.7 7.8 4.1 30.5 85.1 17.9 21.1 0.8 9.0 2.3 13.9 2.2
2015E 112,558 9,779 8,731 6,942 4,859 1,278 16.65 4.50 102.02 13.2 0.0 8.7 7.8 4.3 26.9 74.7 17.7 21.4 0.7 8.3 2.0 12.3 2.2
2016E 118,750 10,533 9,417 7,752 5,426 3,261 18.59 4.50 115.40 11.7 0.0 8.9 7.9 4.6 24.1 60.9 17.2 21.9 0.7 7.6 1.8 11.0 2.2

Coromandel International 260 210 BSE SENSEX 30 INDEX (rebased)
-1 mth -3 mth -12 mth -16 -6 -1 -15 -7 -8 Muruguppa Group (63.8%) 36% 419,679
Sumit Choudhary
26 February 2014
CRIN IN INR 204.05 INR 215.00
64
Investment thesis
Migration to more lucrative segments CRIN has a mix of fertiliser and non-fertiliser businesses, and we expect its nonfertiliser business to contribute c.34% of EBITDA in FY14. To balance the portfolio, management has a stated goal of at least 50% EBITDA contribution from its nonsubsidised business. We believe its migration to more lucrative businesses will eventually lead to a rerating of CRINs valuation. However, it could be difficult to achieve this target organically without (1) lower fertiliser profitability than we have forecast, or (2) a surge in gypsum profitability. Figure 90: CRIN: non-fertiliser EBITDA and EBITDA as % of total EBITDA
4,500 4,000 3,500 3,000 INR mn 2,500 2,000 1,500 1,000 500 0 FY12
YE March Source: Company, Standard Chartered Research estimates
Non-fertilizer EBITDA 38% 34%
As % of total EBITDA 37% 40%
45% 40% 35% 30% 25% 20% 15% 10% As % of total EBITDA
27%
FY13
FY14E
FY15E
FY16E
Unique farmer-connect initiative CRIN has a differentiated strategy from its peers in achieving farmer connect with a retail initiative. It has c. 650 retail stores under the Manna Gromor Centre (MGC) initiative. CRIN intends to increase the store count to 1,000 in the next few years. We believe the MGC initiative will help CRIN push its own products against other branded items, and enhance non-subsidised business profitability. The strength of its MGC franchise was corroborated by our recent on-the-ground visits to MGC stores in Andhra Pradesh, where MGCs are gaining market share from local dealers. We were particularly impressed by the width of products offered under the same roof and by its farmer-connect initiative, which includes a farmer helpline. Highly integrated fertiliser business weighed down by industry concerns CRINs highly integrated fertiliser business enables it to capture most parts of the fertiliser value chain. In addition, it has high brand recall in Gromor and Godavari, especially in key markets such as Andhra Pradesh. However, the fertiliser industry in India has suffered from issues ranging from high inventory levels to high subsidy receivables, which could dampen business sentiment in the medium term, in our view.
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Valuation appears to be full; our forecast trails consensus While we view CRIN as a high-quality play and agree with its strategy to diversify away from the subsidy business over time, our EPS forecast for FY15 is c.17% below consensus. We believe our valuation is fully reflected in the current share price level.
Valuation
We value CRIN on an SOTP basis, ascribing different valuation multiples to its fertiliser and non-fertiliser businesses. Figure 91: CRIN: SOTP valuation
YE March Fertilisers Non-fertilisers EV Less : Net debt Equity value Per share
FY16E EBITDA 6,353 4,180
Multiple 6.5x 10.0x
Valuation 41,297 41,795 83,092 -20,459 62,633 215
We value the fertiliser business at an EV/ EBITDA multiple of 6.5x and the nonfertiliser business at 10x EV/ EBITDA. Our total valuation translates into 12-month forward PER of 11.5x, largely in line with the historical average PER at which CRIN has traded. Figure 92: CRIN: historical PE band
25 Coromandel Intl. forward PER Average +1 SD -1 SD
20
PER multiple
15
10
Target PER 11.5x
0 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
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66
Risks
Key risks to our investment view of CRIN relate to the following: Policy changes and subsidy delays: CRIN derives c. 80% of revenue from the fertiliser business. Relatively open import markets after the NBS implementation and freely implemented pricing have capped fertiliser business profitability, in our view. In addition, as the government still provides a significant subsidy in the fertiliser segment, there is a risk that closer monitoring of prices or a reduction in subsidies could adversely impact profitability in its fertiliser division. Adverse weather: Like all agricultural companies, CRIN is exposed to significant swings in domestic weather conditions, particularly monsoons. Irrational expansion: While we support managements goal of increasing the proportion of non-subsidised revenue and profitability, any irrational acquisition made to fulfil this ambition would have negative implications for the stock.
CRIN is a flagship company of the Murugappa group and operates in the agriculture inputs segment. It started as a fertiliser JV among IMC, Chevron and EID Parry in 1961. Since then, CRINs capacity has grown multi-fold through organic and inorganic expansion in order to reach its targeted fertiliser capacity of c.5mn MT by FY14. The company operates the following key divisions: Fertilisers This division engages predominantly in the production and trading of phosphatic and complex fertilisers. CRIN sells its products under multiple brands, including Gromor and Godavari, which are among the most respected in the industry. We estimate the fertiliser division will comprise 80% of total revenue and 66% of EBITDA in FY14E. Manufacturing facilities are located in Vishakapatnam, Kakinada, Ennore and Ranipet. All plants enjoy strategic coastal locations, which enable cost savings on inland transportation in importing raw materials. The plants are also close to fertiliser target markets, which helps reduce cost in transporting finished goods. Figure 93: CRIN: strategic locations of plants
Visak
Kakinada
Ennore Ranipet
Source: Company
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67
CRINs multiple strategic alliances across the industry spectrum assure raw material supplies. Figure 94: CRIN: global strategic alliances
Input MOP Rock-phosphate WSF and MAP Phosphoric acid Ammonia and sulphur Urea Tie-up 0.5mn mt supply agreement: Potash-Canada 0.9mn mt supply agreement: Israel, Togo, Algeria JV with SQM, Chile 14% equity in FOSKOR, Africa 15% stake in Trifert, Tunisia Pact with QAFCO for supply of ammonia 0.61mn mt ammonia and 0.3mn mt sulphur: Mitsui Japan 0.25mn mt supply pact with QAFCO
Fertiliser production declined in FY13, when a high quantum of imported inventory in the system affected domestic producers. The company believes the inventory situation is improving. Crop protection: CRIN manufactures and markets crop protection products, including insecticides, fungicides, herbicides and plant growth regulators. Its crop protection portfolio includes several popular brands that enjoy leadership status in India and abroad. CRIN also exports its products and has tie-ups with companies such as Nihon Nohyaku, Syngenta, DuPont, BASF, FMC and Otsuka to market their products in India. Coromandel produces its crop protection products at plants in Ankleshwar and Navi Mumbai (technicals), Ranipet and Jammu (formulations). In December 2011, the company acquired a c.75% stake in Sabero Organics Gujarat (Sabero) and is now in the process of integrating Sabero into itself. The majority of Saberos revenue comes from exports to Latin American markets. However, Sabero had been struggling under environmental restrictions that prevented it from operating above 55% capacity utilisation. Since the takeover, CRIN has obtained approval for Sabero to operate at up to 75% utilisation; it has also applied for a further increase in capacity utilisation. Speciality nutrients: This division, which comprises water soluble fertilisers and micronutrients, has strong growth potential, owing to growing drip irrigation acreage and deteriorating soil quality in the country. The company has dedicated exclusive field force to promote the growth of this segment to optimise its potential. It has a water soluble fertiliser business through a 50/50 JV with SQM (Coromandel SQM). Retail: CRIN retails agriculture products through its Manna Gromor Centres (MGCs). The company has over 650 MGCs across the country, with a strong presence in Andhra Pradesh. Its MGC initiative not only promotes and sells CRINs fertilisers, but also third-party agro-inputs such as pesticides, PGN and agricultural implements.
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Management: CRINs management team is listed below: Figure 95: CRIN: board of directors
A Vellayan V Ravichandran Kapil Mehan M M Venkatachalam B V R Mohan Reddy Ranjana Kumar Uday Chander Khanna J S Sarma
Source: Company
Chairman Vice Chairman Managing Director Director Director Director Director Director
Financials
We present below the key assumptions in our forecast of CRINs financials. Fertiliser business: We assume an increase in manufactured fertiliser production from 1.9mt in FY13 to 2.6mt by FY16E. We assume lower realisations in FY14E, in line with the trend witnessed YTD. Owing to a reduction in fertiliser trading volumes to negligible levels, we believe EBITDA per tonne will improve from INR 1,379 in FY13 to over INR 1,850 by FY15E. Figure 96: CRIN: fertiliser revenue and EBITDA
93,000 91,000 89,000 87,000 INR mn 85,000 83,000 81,000 79,000 77,000 75,000 FY12 FY13 FY14E FY15E FY16E
Data include Liberty group financials from 4QFY13 Source: Company, Standard Chartered Research estimates
Fertilizer revenue 7,669
Fertilizer EBITDA
9,000 8,000
5,899 5,095
6,148
6,353
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 INR mn
Non-fertiliser business: We assume an 18.5% CAGR in FY13-16E in CRINs nonfertiliser portfolio and flattish growth in overall margins. We project a stronger-thanindustry growth rate, owing to the nascent stage of its retail initiative. We see the Sabero business turning in 45% revenue growth in FY14E, owing to improved capacity utilisation and project 10% revenue CAGR in FY14-16E. We project Saberos EBITDA margin will improve from 11% in FY14E to 12% over FY15/16E.
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Figure 97: CRIN: non-fertiliser business revenue and EBITDA

30,000 25,000 20,000 INR mn 15,000 10,000 5,000 0 FY12 FY13 FY14E FY15E FY16E
Saberos financials are included from 4QFY12 Source: Company, Standard Chartered Research estimates
Non-fertilizer revenue
Non-fertilizer EBITDA
As a consequence of our above assumptions, we project non-fertiliser EBITDA contribution will improve from 34% in FY14E to 40% by FY16E. EPS growth: As a consequence of our above revenue and margin projections, we expect EPS to move from INR 14.7 in FY14E to INR 18.6 by FY16E. Figure 98: CRIN: EPS and EPS growth
25 EPS EPS growth (%) 20% 10% 0% INR per share 15 Growth -10% 10 -20% 5 -30% -40% FY12 FY13 FY14E FY15E FY16E
20
0
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Year-end: Mar Sales Gross profit SG&A Other income Other expenses EBIT Net interest Associates Other non-operational Exceptional items Pre-tax profit Taxation Minority interests Exceptional items after tax Net profit Net profit adj. EBITDA EPS (INR) EPS adj. (INR) DPS (INR) Avg fully diluted shares (mn) 2012 2013 2014E 2015E 2016E 99,016 90,337 102,623 112,558 118,750 20,587 23,401 25,656 28,139 29,687 (2,541) (3,009) (4,059) (4,425) (4,678) (8,099) (13,424) (13,616) (14,983) (15,592) 9,947 6,968 7,980 8,731 9,417 (481) (1,401) (1,830) (1,789) (1,665) 0 0 0 0 0 9,467 5,567 6,150 6,942 7,752 (2,766) (1,231) (1,660) (2,083) (2,326) 43 (17) (150) 0 0 (355) 0 (126) 0 0 6,388 4,320 4,213 4,859 5,426 6,388 10,544 22.64 22.51 7.00 284 4,320 7,679 15.27 15.23 4.50 284 4,213 8,961 14.75 14.70 4.50 287 4,859 9,779 16.70 16.65 4.50 292 5,426 10,533 18.65 18.59 4.50 292

Year-end: Mar EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions & Investments Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2012 9,947 597 (481) (2,766) (10,984) (313) (4,000) (8,344) (369) (8,713) (1,978) 26 13,811 158 12,017 (695) (12,343) 2013 6,968 711 (1,401) (1,231) 415 (17) 5,446 (5,215) 732 (4,483) (1,274) (5,084) 24 905 (5,428) (4,466) 231 2014E 7,980 981 (1,830) (1,660) (435) (276) 4,759 (1,701) 0 (1,701) (1,504) 520 0 (169) (1,153) 1,905 3,058 2015E 8,731 1,048 (1,789) (2,083) (2,858) 0 3,050 (1,772) 0 (1,772) (1,532) 1,166 (1,000) (894) (2,260) (982) 1,278 2016E 9,417 1,116 (1,665) (2,326) (1,781) 0 4,761 (1,500) 0 (1,500) (1,532) 0 (2,000) 0 (3,532) (271) 3,261

Year-end: Mar Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long-term assets Total long-term assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible bonds Deferred tax Other long-term liabilities Total long-term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year-end shares (mn) 2012 9,847 0 9,579 19,218 20,612 59,257 14,555 3,671 2,168 20,394 79,651 23,571 21,163 3,702 48,436 5,863 675 516 7,053 55,490 24,003 158 24,161 79,651 19,587 283 2013 5,346 2 18,201 14,775 20,423 58,747 17,897 4,867 2,610 25,374 84,121 18,490 24,014 5,257 47,760 10,969 1,877 487 13,332 61,092 21,966 1,063 23,029 84,121 24,112 283 2014E 7,251 2 18,382 16,968 19,922 62,525 18,416 5,068 2,610 26,094 88,619 18,490 25,452 5,257 49,198 10,969 1,877 487 13,332 62,531 25,195 894 26,089 88,619 22,207 286 2015E 6,269 2 20,151 18,601 21,827 66,851 18,868 5,340 2,610 26,818 93,668 18,490 27,902 5,257 51,648 9,969 1,877 487 12,332 63,980 29,688 0 29,688 93,668 22,189 291 2016E 5,997 2 21,254 19,619 23,015 69,887 19,252 5,340 2,610 27,202 97,089 18,490 29,429 5,257 53,175 7,969 1,877 487 10,332 63,507 33,582 0 33,582 97,089 20,461 291

Year-end: Mar Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj. (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op. cash/EBIT (x) Depreciation/capex (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj. (x) PBR (x) Dividend yield (%) 2012 20.8 10.6 10.0 6.5 29.2 29.6 -7.9 -8.2 -7.9 0.0 2013 25.9 8.5 7.7 4.8 22.1 -8.8 -32.4 -32.5 -32.4 -35.7 2014E 25.0 8.7 7.8 4.1 27.0 13.6 -2.5 -3.4 -3.4 0.0 2015E 25.0 8.7 7.8 4.3 30.0 9.7 15.3 13.2 13.2 0.0 2016E 25.0 8.9 7.9 4.6 30.0 5.5 11.7 11.7 11.7 0.0
29.3 36.0 1.5 -0.4 0.1 79.9 21.4 84.6
18.8 20.6 1.1 0.8 0.1 92.7 56.1 123.2
17.9 21.1 1.2 0.6 0.6 75.3 65.1 117.3
17.7 21.4 1.2 0.3 0.6 76.9 62.5 115.3
17.2 21.9 1.2 0.5 0.7 78.3 63.6 117.5
81.1 7.9 1.2
104.7 3.3 1.2
85.1 3.3 1.3
74.7 3.7 1.3
60.9 4.2 1.3
1.0 9.0 9.5 12.8 12.9 3.2 2.4
1.0 12.2 13.4 16.6 16.7 2.4 1.8
0.8 9.0 10.1 13.8 13.9 2.3 2.2
0.7 8.3 9.3 12.2 12.3 2.0 2.2
0.7 7.6 8.5 10.9 11.0 1.8 2.2
26 February 2014
71
India l Emerg ing Co mp anies
26 Feb ruar y 2014
Dhanuka Agritech
NON-COVERED COMPANY VISIT NOTE
NOT RATED
Standard Chartered Equity Research does not cover this company and nothing herein should be interpreted to be a recommendation or price target with respect to the company.
INR 200.00
Key points Dhanuka Agritech (DAGRI) is a manufacturing and branding company for pesticides in India. The company claims to have the second-largest rural distribution network in India with 7,500 dealers. DAGRI management believes that herbicides would be the fastest growing segment in the Indian pesticides market driven by high rural wages and shortage of labour. DAGRI delivered a CAGR of 19% in revenue and 20% in EBITDA terms between FY08-13.
Bloomberg code: DAGRI IN PER historical (x) 15.5x Mkt cap (USD mn) 161 Yield historical (%) 1.4% 12m range (INR) 112-218 P/B historical (x) 3.8x 3m value traded (USDm) 0.4 ROE (%) 27.0% No. of shares (m) 50.01 Net gearing (%) 8% Est. free float (%) 25% Net debt (cash) (INR mn) 205 Established 1985 Historical EPS (INR) 12.88 Listed 1991 EPS 3-yr CAGR (%) 18% Secondary placement NA EPS 7-yr CAGR (%) 46% Auditors, since Dinesh Mehta & Co Historical DPS (INR) 2.8 Year-end March DPS 3-yr CAGR (%) 26% Major shareholder M/s Golden Overseas Pvt. Ltd 16.47%
Source: Annual report
What DAGRI does DAGRI is one of the largest players in the domestic pesticides industry. The company has a marketing network of 7,500 dealers with a reach to over 70,000 retailers across India. DAGRI also has a tie-up with multiple international partners for in-licensing/ comarketing of their products in India. Why we visited DAGRI Given our positive view on the Indian agro-inputs sector, as highlighted in our report India agriculture: Seeds of prosperity, we visited DAGRI as one of the players in the pesticides market. Focussing in marketing and herbicides DAGRI management is focused on building brand for its business through innovative markets and farmer connect initiatives such as Dhanuka Doctors. The company has 1,500 professionals who provide on-site assistance to farmers and also help in promoting DAGRIs products. In addition, the company believes that herbicides can be a key beneficiary of high rural wages and tight labor availability in rural India. Valuations and share price performance DAGRI trades at 11.4x FY14E PER based on Bloomberg consensus expectations. The share price has outperformed the BSE Sensex by 47% over the past 12 months.
Share price performance (INR)

Dhanuka Agritech BSE SENSEX 30 INDEX (Rebased)
210 200 190 180 170 160 150 140 130 110 120 110 Feb-13 Feb-13
Source: FactSet
May-13
Aug-13 Aug-13
Nov-13 Nov-13
Feb-14
Sumit Choudhary
26 February 2014
72
Visit note
Strong sector growth The Indian pesticides market is poised for a strong structural growth in our opinion, as highlighted in our report India agriculture inputs: Seeds of prosperity. We anticipate the domestic pesticides market to grow at a CAGR of 9% over FY13-17E, driven by the need to improve yields and stagnating land supply in the country. Company overview DAGRI manufactures a wide range of pesticides covering herbicides, insecticides, fungicides, and plant growth regulators. The company reaches out to more than 10mn farmers across India through a network of more than 7,500 distributors/ dealers selling to over 70,000 retailers across India, as per the management. DAGRI has three manufacturing units located at Gurgaon (Haryana), Sanand (Gujarat) and Udhampur (J&K). Focus on speciality molecules More than half of DAGRIs sales comprise specialty molecules and the remaining comprises generics. DAGRIs largest product by turnover is Targa Super (herbicide) and is in a technical tie-up with Nissan Chemical Industries Ltd., Japan. DAGRI has technical tie-ups with three US and five Japanese companies. The company launched five new molecules in FY13 and three in 1HFY14. The company has another 6-7 products in the pipeline and expects to launch two products every year. DAGRI management also has a strong focus on herbicides driven by the belief that herbicides would be a stronger growth area within the Indian pesticides universe. In 1HFY14, herbicide sales grew by over 50% for the company. Differentiated marketing strategy As highlighted in our report India agriculture inputs: Seeds of prosperity, the Indian pesticides market is dominated by brand perception and distribution strength. To this extent, DAGRI management believes that it has one of the strongest distribution networks in the country. In addition, as per the management, the company has tried to differentiate its offering through a team of 1,500 Dhanuka Doctors who work as on-site consultants for farmers. A team of scientists and experts works on quality improvement in existing products, counseling to farming community, training Dhanuka Doctors, field trials, conducting seminars, coordinating with various research institutions and universities and data analysis. Potential to unlock land value over medium term DAGRI has 6 acres of land in Gurgaon, on which the Gurgaon plant is located. The company is trying to move the production from Gurgaon to a new facility in Keswana and expects the process to take 2-3 years. The company has mentioned that post migration of production, it would think of options to dispose of the surplus land in Gurgaon. Balance sheet DAGRI has a strong balance sheet with zero long-term debt. Overall net debt to EBITDA ratio as on Sep 13 stood at 0.21x. The company generated an RoE of 27% in FY13. Management The company is predominantly managed by the founding family. The founding promoters, R.G. Agarwal and M.K. Dhanuka oversee the whole operations as the Chairman and Managing Director respectively and have been involved with the Company since inception. Some other key executives are Rahul Dhanuka, Director (Marketing), Mridul Dhanuka, Director (Operations) and Harsh Dhanuka, SGM (Marketing).
26 February 2014
73
Valuation
Figure 99: Comps table
Price Market cap (LCY) (USDm) 157 1,478 185 1,319 204 201 492 875 1,351 368 940 162 PER (x) FY14E 20.7x 19.2x 9.5x 17.7x 13.9x 11.4x 15.8x FY15E 16.6x 16.2x 8.2x 15.2x 12.3x 9.7x 13.7x FY16E 13.4x 12.3x 7.5x NA 11.0x 7.7x 11.0x EV/EBITDA FY14E 12.1x 13.6x 5.9x 14.1x 9.0x 8.6x 10.6x FY15E 10.0x 11.5x 5.3x 12.3x 8.3x 7.3x 9.2x FY16E 8.1x 9.3x 4.6x NA 7.6x 5.8x 7.6x Div yield FY14E 1.9 0.5 1.6 2.3 2.2 1.9 1.9 ROCE FY13 25.8 19.7 16.9 17.0 20.6 27.5 20.1 Ticker RALI IN BYRCS IN UPLL IN MCHM IN CRIN IN DAGRI IN Median Name Rallis India Bayer India UPL Ltd. Monsanto India Coromandel Dhanuka Agritech
Source: Standard Chartered Research estimates for Rallis, UPL and Coromandel. Valuations for Non Rated companies are from Bloomberg, as of 25 February 2014
Company background
Figure 100: Company background
Main shareholders Shareholders with >1% shareholding
Promoters: 75.0% FIIs: 8.4% Others: 16.6%

Management and directors
2020 EQUITY INVESTORS,LIMITED
Mr. Ram Gopal Agarwal - Chairman Mr. Mahendra Kumar Dhanuka - Managing Director V.K. Bansal - Chief Financial Officer Mr. Arun Kumar Dhanuka - Executive Director Mr. Rahul Dhanuka - Executive Director Mr. Mridul Dhanuka - Executive Director
Source: Company, NSC
Key charts
Figure 101: DAGRI new product launches
FY12 - 13 Fluid Fuzi Super Lustre Dhanzyme Gold granules
Source: Company
Figure 102: DAGRI distribution network

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Distributors
Source: Company
FY13 - 14 Danfuron Protocol Defend
FY 2008 FY 2013
Dhanuka Doctors
26 February 2014
74
Trend analysis and six-year financial data

Growth
80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 FY12 FY13 Sales growth (%) Earnings growth (%)

Year end: Mar Sales revenue Gross profit EBITDA Depreciation & amortisation EBIT Net interest (expense) / income Others Income tax PAT Minorities Net income 2008 2,482 1,070 327 -21 306 -42 0 -95 169 0 169 2009 3,366 1,430 478 -27 451 -95 0 -124 232 0 232 2010 4,081 1,718 583 -31 552 -62 0 -127 363 0 363 2011 4,910 1,650 759 -49 711 -38 0 -161 511 0 511 2012 5,292 1,866 794 -45 749 -49 0 -129 571 0 571 2013 5,823 2,012 819 -45 774 34 0 -163 644 0 644
Margins
15% EBIT margin 14% 13% 12% 11% FY08 FY09 FY10 FY11 FY12 FY13 12% 13% 14% 13% 14% 14%
Cash flow (INR mn)

Year end: Mar Operating profit Depreciation & amortisation Working capital Others Operational cash flow Tax paid After-tax operational cash flow Capex Net interest Debt Dividends Others Net flow 2008 306 21 -320 -40 -33 -95 -128 -57 -42 90 -46 139 -44 2009 451 27 -255 -95 128 -124 4 -14 -95 10 -55 171 20 2010 552 31 -304 -50 229 -127 103 -137 -62 62 -64 116 18 2011 711 49 -290 -27 442 -161 281 -4 -38 -1 -100 -59 78 2012 749 45 -95 -51 649 -129 520 -3 -49 -116 -110 -160 83 2013 774 45 -218 37 638 -163 475 -245 34 -123 -140 12 12
Cash flow
600 400 INR mn 200 0 Op cash flow generated Capex

Year end: Mar Tangible assets Other LT assets Stocks Debtors Cash and liquid assets Other ST assets Total Assets Current creditors Current borrowings Long-term borrowings Others Total liabilities Shareholders funds Minority interests Equity Total capital employed 2008 228 7 697 628 40 293 1,894 189 319 186 686 1,380 514 0 514 1,019 2009 244 6 936 747 34 414 2,380 378 248 267 804 1,697 683 0 683 1,198 2010 382 4 1,113 956 20 484 2,960 409 216 361 1,002 1,989 971 0 971 1,548 2011 381 138 1,419 1,377 50 212 3,576 522 402 174 774 1,871 1,705 0 1,705 2,280 2012 388 187 1,388 1,512 240 242 3,956 543 403 57 808 1,810 2,146 0 2,146 2,606 2013 619 202 1,599 1,507 136 141 4,205 450 337 0 790 1,577 2,628 0 2,628 2,964
-200 -400 FY08 FY09 FY10 FY11 FY12 FY13
Balance sheet
1.0 Net debt / equity 0.8 0.6 0.4 0.2 0.0 FY08 FY09 FY10 FY11 FY12 FY13 0.9 0.7 0.6 0.3 0.1 0.1
Key data & ratio

Year end: Mar EPS (INR) Chg % DPS (INR) CFPS (INR) BVPS (INR) Wtd avg shares ROE (%) Post-tax ROCE (%) Capex/sales (%) Capex/depreciation (%) Net debt/equity (%) Total debt/Total capital (%) Net interest cover (%)
Source: Company
Returns
50% 40% 30% 20% 10% 0% FY08 FY09 FY10 FY11 FY12 FY13
Source: Company
ROE (%)
RoCE (%)
2008 3.69 61% 1.00 -2.78 11.20 46 37.1% 23.0% 2.3% 266.0% 0.9 49.6% 7.33
2009 5.06 37% 1.20 0.08 14.88 46 38.8% 29.5% 0.4% 52.5% 0.7 43.0% 4.75
2010 7.92 57% 1.40 2.24 21.16 46 43.9% 31.0% 3.4% 440.3% 0.6 37.3% 8.91
2011 10.22 29% 2.00 5.61 34.08 50 38.2% 28.7% 0.1% 8.9% 0.3 25.2% 18.61
2012 11.42 12% 2.20 10.39 42.90 50 29.7% 25.4% 0.0% 5.7% 0.1 17.7% 15.38
2013 12.88 13% 2.80 9.49 52.53 50 27.0% 21.9% 4.2% 540.4% 0.1 11.4% -22.62
26 February 2014
75
India l Emerg ing Co mp anies
26 Feb ruar y 2014
Jain Irrigation Systems

NON-COVERED COMPANY VISIT NOTE
NOT RATED
Standard Chartered Equity Research does not cover this company and nothing herein should be interpreted to be a recommendation or price target with respect to the company.
INR 58.20
Key points Jain Irrigation (JI) is the largest player in the micro irrigation segment in India. The company also has a presence in the food processing and pipe industries. Indias micro-irrigation industry has witnessed a strong 22% CAGR over FY08-13. The company has been plagued with high working capital issues in the past and management has made efforts to reengineer its business model over the past two years. JI has floated an associate NBFC.
Bloomberg code: JI IN PER historical (x) NA Mkt cap (USD mn) 410 Yield historical (%) 0.75 12m range (INR) 46-75 P/B historical (x) 1.2 3m value traded (USDm) 1.8 ROE (%) 6.5% No. of shares (m) 435.6 Net gearing (%) 165% Est. free float (%) 70% Net debt (cash) (INR mn) 35,973 Established 1989 Historical EPS (INR) 0.07 Listed 1993 EPS 3-yr CAGR (%) NA Secondary placement NA EPS 7-yr CAGR (%) NA Auditors, since Haribhakti & co., Historical DPS (INR) 0.50 2010 Year-end March DPS 3-yr CAGR (%) -18% Major shareholder Jalgaon Investments Pvt. Ltd 22.18%
Source: Annual report
What JI does JI is the largest micro irrigation player in India with an estimated FY13 market share of 55%, as per the company. JI has a 35% share in the sprinkler irrigation market. In addition to micro irrigation, the company also has a presence in food processing and pipe products. Why we visited JI Given our positive view on the Indian agro-inputs sector, as highlighted in our report Indian agricultural inputs: Seeds of prosperity, we visited JI as a key player in the micro irrigation segment. In addition, the company has increased efforts to improve its working capital and leverage situation. We visited the company to understand the current working capital situation as well. Reinventing business model Over the past two years, JI has migrated to a structure whereby the dealers pay the entire amount due to the company between 90-180 days from the sale and the company in turn incentivizes dealers by arranging low cost funding or cash discounts. The company expects this effort to help it in alleviating the overall balance sheet stress. Valuations and share price performance JI trades at 15.8x FY14E PER based on Bloomberg consensus estimates. The share price has underperformed the Nifty by 13% over the past 12 months. Sumit Choudhary
Share price performance (Bt)

Jain Irrigation Systems 75 70 65 60 55 50 45 Feb-13
Source: FactSet
BSE SENSEX 30 INDEX (Rebased)
May-13
Aug-13
Nov-13
Feb-14
26 February 2014
76
Visit note
Strong sector growth The Indian micro irrigation segment has witnessed a 22% CAGR over FY08-13. As highlighted in our sector note India agriculture inputs: Seeds of prosperity, owing to the high level of variability in Indian monsoon patterns, development of irrigation facilities is pertinent for agriculture growth. However, owing to exposure to subsidy delays and policy changes, micro irrigation is not our preferred play on the agro-inputs space. Company overview JI is the prominent player in Indias micro irrigation space with a market share of 55% in drip irrigation and 35% in sprinkler irrigation, according to management. The addition to micro irrigation, which comprised 46% of FY13 revenues, the company operates in the following segments: Pipe products: This segment comprises supply of PVC and PE pipes and constituted 22% of revenues for JI in FY13. The company estimates that it has c.15% in the domestic PVC business in FY13. PE pipes are used for applications such as sewage and effluent disposal and are also replacing cement/metal pipes in select industrial segments including cable ducts, sprinklers, gas distribution and water conveyance. Food products: This segment comprises food processing and is largely made up of dehydrated fruits and onions for sale in domestic and international markets. Food products comprised 20% of revenues for JI in FY13. Solar products: This is a relatively small segment for JI with revenues being less than 5% of overall revenues for FY13. The current range of products includes domestic, commercial and industrial solar powered pumping systems, CFL/LED based lighting systems, etc. Reinventing business model According to the company, typically 50-70% of sale value of MIS pumps is subsidized by the government. In the past, the company had suffered delays in recouping these subsidies, leading to strained cash flows. Over the past two years, the company has migrated to a structure whereby the dealers pay the entire amount due to the company between 90-180 days from the sale and the company in turn incentivizes dealers through arranging low cost funding or cash discounts. As a result of this effort, the company has seen its debtor days reduce from 168 in FY12 to 142 days in FY13, according to management. The company has also seen an erosion in its margins (excluding other income), which have reduced from 19% in FY12 to 15.4% in FY13, as per management. NBFC to help alleviate stress JI floated a group NBFC company, Sustainable AgriCommercial Finance (SACF) in 2012. Currently JI has a 49% stake in SACF with the balance being held by the promoters of JI and IFC. While the NBFCs balance sheet is currently small in scale, JI expects to accelerate disbursements from the NBFC over the medium term to its dealers and suppliers. Balance sheet As a consequence of accumulated subsidies and receivables, JI had a net debt of INR 36bn as of FY13. The net debt to EBITDA ratio for FY13 was 5x and net debt/ equity ratio was 1.7x. Management The company was founded by the Jain family, which continues to retain management control of JI. The promoters held a 30% stake in the company as on 31 December 2013. Catalysts for change The company expects alleviation of the working capital situation along with return to a growth model along with stabilized margins to be a key catalyst for change going forward.
26 February 2014
77
Key charts
Figure 103: JI receivable days
180 160 140 120 Days 100 80 60 40 20 0 FY08
Source: Company
Figure 104: JI net working capital days

168 149 142 210 205 200 Days 195 190 185 180 175 185 187 191 204 200
108
111
108
196
FY09
FY10
FY11
FY12
FY13
FY08
Source: Company
FY09
FY10
FY11
FY12
FY13
Figure 105: Revenue break up (FY13) Rest of World 15% North America 11% India 57% Europe 17%
Figure 106: Historical revenue growth

60,000 50,000 INR mn 40,000 30,000 20,000 10,000 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Micro Irrigation Solar Products Piping Products Other Products Food Products
Source: Company
Source: Company
Company background (Optional)

Figure 107: Company background Main shareholders Promoters: 27.5% FIIs:52.4% DIIs: 1.6% Others: 18.5% Shareholders with >1% shareholding MKCP Institutional Investor Macquarie Bank Limited International Finance Corporation Government Pension Fund Global Emerging Markets Growth Fund Inc. Templeton Funds-Templeton Foreign Fund Pictet Water The State Teachers Retirement System of OHIO Dunearn Investments (Mauritius) Pte Lantau Institutional Investor (Mauritius) Ltd Wellington Management Company, LLP Templeton Institutional Funds Templeton Global Smaller Companies Fund General Electric Pension Trust Templeton International Smaller Companies Fund
Management and directors Bhavarlal H. Jain Chairman Ashok B. Jain Vice Chairman Anil B. Jain CEO & Managing Director Manoj L. Lodha President -Finance
Source: Company
26 February 2014
78
Trend analysis and six-year financial data

Growth
200% 100% 0% -100% -200% FY08 FY09 FY10 FY11 FY12 FY13 Sales growth (%) Earnings growth (%)

Year end: Mar Sales revenue Gross profit EBITDA Depreciation & amortisation EBIT Net interest (expense) / income Others Income tax PAT Minorities Net income 2008 22,159 5,786 3,490 -558 2,932 -1,327 169 -517 1,349 -25 1,324 2009 28,584 9,954 5,016 -684 4,332 -1,809 70 -664 1,331 -37 1,294 2010 34,200 9,955 5,937 -1,020 4,917 -2,155 51 -1,194 2,487 -12 2,476 2011 41,528 11,557 7,658 -1,222 6,437 -2,678 56 -1,213 2,881 -74 2,807 2012 49,206 17,147 9,366 -1,441 7,925 -4,074 100 0 2,286 -51 2,235 2013 50,217 17,260 7,735 -1,696 6,040 -4,688 19 -80 45 -14 31
Margins
17% 16% EBIT margin 15% 14% 13% 12% 11% 10% FY08 FY09 FY10 FY11 FY12 FY13 13% 12% 15% 14% 16% 16%
Cash flow (INR mn)

Year end: Mar Operating profit Depreciation & amortisation Working capital Others Operational cash flow Tax paid After-tax operational cash flow Capex Net interest Debt Dividends Others Net flow 2008 2,932 558 -5,881 -609 -2,999 -517 -3,517 -4,376 -1,327 4,166 -159 4,355 -856 2009 4,332 684 -1,956 -1,981 1,079 -664 415 -4,837 -1,809 5,413 -181 924 -75 2010 4,917 1,020 -2,372 -977 2,588 -1,194 1,394 -4,179 -2,155 6,278 -342 3,078 4,073 2011 6,437 1,222 -5,121 -2,365 173 -1,213 -1,041 -4,733 -2,678 5,405 -386 2,411 -1,021 2012 7,925 1,441 -5,836 -5,314 -1,785 0 -1,784 -5,906 -4,074 8,144 -405 2,976 -1,048 2013 6,040 1,696 -2,270 -6,054 -589 -80 -669 -2,881 -4,688 314 -227 7,183 -968
Cash flow
2,000 INR mn 0 Op cash flow generated Capex

Year end: Mar Tangible assets Other LT assets Stocks Debtors Cash and liquid assets Other ST assets Total Assets Current creditors Current borrowings Long-term borrowings Others Total liabilities Shareholders funds Minority interests Equity Total capital employed 2008 7,593 3,337 8,099 6,556 1,036 3,039 29,661 5,134 6,145 6,611 2,389 20,279 8,732 649 9,381 22,137 2009 11,483 3,658 9,859 8,663 1,174 3,352 38,189 5,982 8,452 9,717 4,362 28,513 8,971 705 9,676 27,845 2010 14,747 3,801 10,638 10,099 5,053 3,883 48,220 7,045 8,646 15,802 3,990 35,482 12,167 571 12,738 37,186 2011 18,298 5,173 14,864 16,924 4,144 4,153 63,557 12,696 19,677 10,175 4,926 47,475 15,558 524 16,082 45,935 2012 21,568 7,427 14,614 22,712 3,308 5,219 74,848 13,497 25,671 12,326 5,320 56,813 17,537 498 18,034 56,031 2013 23,785 7,977 17,231 19,547 2,359 7,310 78,208 13,379 23,982 14,329 4,838 56,528 21,680 0 21,680 59,991
-2,000 -4,000 -6,000 FY08 FY09 FY10 FY11 FY12 FY13
Balance sheet
2.5 Net debt / equity 2.0 1.5 1.0 0.5 0.0 FY08 FY09 FY10 FY11 FY12 FY13 1.3 1.9 1.6 1.7 2.0 1.7
Key data & ratio

Year end: Mar EPS (INR) Chg % DPS (INR) CFPS (INR) BVPS (INR) Wtd avg shares ROE (%) Post-tax ROCE (%) Capex/sales (%) Capex/depreciation (%) Net debt/equity (%) Total debt/Total capital (%) Net interest cover (%)
Source: Company
Returns
25% 20% 15% 10% 5% 0% FY08 FY09 FY10 FY11 FY12 FY13
Source: Company
ROE (%)
RoCE (%)
2008 4.02 42% 0.44 -10.68 24.24 329 19.4% 13.8% 19.7% 784.8% 1.3 57.6% 2.21
2009 3.58 -11% 0.50 1.15 24.79 362 13.6% 14.7% 16.9% 707.1% 1.9 65.3% 2.39
2010 6.58 84% 0.90 3.71 32.01 376 22.1% 11.5% 12.2% 409.9% 1.6 65.7% 2.28
2011 7.37 12% 1.00 -2.73 40.33 381 19.5% 12.6% 11.4% 387.4% 1.7 65.0% 2.40
2012 5.52 -25% 1.00 -4.40 43.28 405 13.1% 15.5% 12.0% 409.9% 2.0 67.8% 1.95
2013 0.07 -99% 0.50 -1.56 47.66 428 0.2% 10.3% 5.7% 169.9% 1.7 63.9% 1.29
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Appendix 1: Overview of companies

We present an overview of the key players in the Indian agri-inputs industry. Bayer Cropscience. Bayer Cropscience (BYRCS IN, NR) is the subsidiary of Bayer Corp. The company is divided into three business groups: Crop Protection, Environmental Science and BioScience. The crop protection division offers insecticides, fungicides, herbicides, seed treatment and PGNs in India. Bayer has some of the most prominent brands in the Indian insecticides space including Confidor and Admire. Figure 108: BYRCS key financials
(INR mn) Revenue EBITDA EBITDA margin (%) PAT (ex extraordinary) Net profit margin (%) Net debt
*Net debt as on Sep 2013 Source: Company, Standard Chartered Research
FY11 21,373 2,231 10% 1,354 6% -2,581
FY12 22,723 2,527 11% 1,969 9% -4,335
FY13 27,253 3,599 13% -130 0% -9,778
9M14 26,925 3,510 13% 2,610 10% -9,692*
Syngenta. Syngenta India is part of the Syngenta AG group, based in Switzerland. In India, the company provides crop protection and seed processing activities. The company is one of the prominent players in the Indian crop protection business; it offers a range of products in the insecticides, fungicides and herbicides sub segments. Its seed processing division has plants established across India, which mainly process sunflower and corn seeds to meet domestic requirements. Monsanto. Monsanto India (MCHM IN, NR) is the only listed subsidiary of Monsanto outside the US. The company is present predominantly on the herbicides side of the Indian crop protection market. MCHM is a dominant player in the seeds market in India. Figure 109: MCHM key financials
(INR mn) Revenue Agrichem business Seeds business Others Total revenue, net excise EBITDA EBITDA margin (%) PAT (ex extraordinary) Net profit margin (%) Net debt
FY11 1,002 2,693 52 3,634 652 18% 550 15% -1,685
FY12 1,128 2,674 58 3,738 550 15% 499 13% -2,148
FY13 1,568 2,975 59 4,424 697 16% 673 15% -2,713
9M14
5,067 1,426 28% 1,289 25% -2,434*
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Rallis. Rallis (RALI IN, OP) is a Tata group company and has some of the most prominent brands in the Indian crop inputs space. The company has unique farmer outreach programs such as Rallis Kisan Kutumbha and More Pulses. Rallis predominantly provides generic agro-chemicals within the crop protection space. The company also has an 80% stake in a seeds company, Metahelix. Figure 110: RALI key financials
FY11 10,862 1,915 18% 1,260 12% 997
FY12 12,749 1,858 15% 992 8% 1,399
FY13 14,582 2,106 14% 1,190 8% 1,045
9M14 14,151 2,196 16% 1,326 9% -55*
UPL. UPL (UPLL IN, OP) is one of the largest players in the Indian agrochemical market and has a significant presence globally through its multiple acquisitions and offices worldwide. Some of the prominent brands for UPL in India are Mancozeb and Ulala. Figure 111: UPLL key financials
FY11 58,980 10,699 18% 5,840 10% 6,259
FY12 76,713 13,840 18% 6,008 8% 24,318
FY13 91,945 16,618 18% 8,135 9% 22,559
9M14 74,889 13,475 18% 6,491 9% NA
Coromandel International. Coromandel (CRIN IN, IL) has traditionally been one of the strongest players in the domestic fertilizer sector. In addition, the company also has a presence in the crop protection market and has also recently acquired Sabero Organics to strengthen its presence in the generic pesticides segment. Figure 112: CRIN key financials
FY11 76,393 10,556 14% 6,937 9% 5,574
FY12 99,016 10,544 11% 6,743 7% 20,149
FY13 90,337 7,679 9% 4,320 5% 24,076
9M14 78,693 6,260 8% 2,883 4% 17,778*
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PI Industries. PI Industries (PI IN, OP) is a generic crop protection player. In addition, the company also has a conscious strategy of introducing innovator molecules through co-marketing and in-licensing arrangements with international players. Some of the prominent brands for PI are Nominee Gold and Osheen. Figure 113: PI key financials
FY11 7,200 1,152 16% 651 9% 2,306
FY12 8,791 1,434 16% 715 8% 2,306
FY13 11,514 1,806 16% 973 8% 1,999
9M14 12,322 2,345 19% 1,385 11% 902*
Dhanuka Agri. Dhanuka Agritech (DAGRI IN, NR) is a generic crop protection player. The company has a strategy of using a team of crop specialists Dhanuka Doctors to assist farmers improve crop productivity and thereby help build a brand for the company. Figure 114: DAGRI key financials
FY11 4,910 759 15% 511 10% 526
FY12 5,292 794 15% 571 11% 220
FY13 5,823 819 14% 644 11% 201
9M14 5,867 939 16% 707 12% 375*
Nuziveedu Seeds Ltd. Nuziveedu Seeds is one of the strongest players in Bt cotton seeds in India. The company has a wide distribution and dealer network spread across 17 states in India.
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Appendix 2: Hazardous pesticides

The Indian media has many times highlighted the high pesticide content in food items. Given the lack of data, we find it difficult to estimate the most current quantum of hazardous pesticides in use. Yet, we have attempted to assess the overall trend in the use of hazardous pesticides in India. WHO has advised the use of color codes for pesticide containers, based on their toxity levels. This classification is explained below. Figure 115: WHO classification of hazardous pesticides
LD50 for the rat (mg/ kg of body weight) Color identification Oral lethal dose Dermal lethal dose band on label <5 5-50 50-2,000 > 2,000 >=5,000 <50 50-200 200-2000 > 2000 Bright Red Bright Yellow Bright Blue Bright Green
WHO class Ia. Extremely hazardous Ib. Highly hazardous II. Moderately hazardous III. Slightly hazardous U. Unlikely to present acute hazard
Source: WHO, Standard Chartered Research
We have taken a look at the pattern of usage of red and yellow label pesticides in India over the years from FY02 to FY09. Unfortunately, adequate data beyond FY09 is not available at the moment, but note that the overall proportion of Ia (extremely hazardous) and Ib (highly hazardous) pesticides has been declining over the period we have studied. Figure 116: Trend in usage of extremely hazardous (red label) pesticides in India
Consumption of extremely hazardous (as classified by WHO) pesticides in India (in tones) Methyl Parathion Phorate Phosphamidon Bromodiolone Total extremely hazardous pesticides consumption in India As % of total consumption
FY02 3,008 2,215 1,100 79 6,402 13.6%
FY03 3,028 2,316 1,020 83 6,447 13.3%
FY04 3,200 3,010 1,480 50 7,740 18.9%
FY05 3,142 2,155 883 58 6,238 15.3%
FY06 1,472 2,630 549 9 4,660 10.5%
FY07 1,460 1,418 500 17 3,395 8.8%
FY08 1,286 1,897 140 78 3,401 10.1%
FY09 1,450 1,534 194 14 3,192 9.1%
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Figure 117: Trend in usage of highly hazardous (yellow label) pesticides in India
Consumption of highly hazardous (as classified by WHO) pesticides in India (in tones) Dichlorvos Monocrotophos Oxydemeton methyl Triazophos Carbofuran Cyfluthrin Methomyl Propetamphos Thiometon Ediphenphos Total highly hazardous pesticides consumption in India As % of total consumption
FY02 1,070 2,815 512 114 419 0 41 0 1 22 4,994 10.6%
FY03 1,250 3,205 382 108 308 0 38 0 1 25 5,317 11.0%
FY04 818 3,115 213 115 500 5 10 0 1 20 4,797 11.7%
FY05 1,295 3,500 352 105 495 34 28 0 28 6 5,843 14.4%
FY06 1,849 1,465 166 0 469 0 13 9 2 18 3,991 9.0%
FY07 613 1,950 163 13 515 16 13 169 11 18 3,481 9.0%
FY08 70 1,386 107 144 288 7 26 8 31 1 2,069 6.1%
FY09 149 1,593 204 13 472 110 60 17 157 5 2,781 7.9%
While there is certainly a need to address the indiscriminate and unauthorized use of banned and restricted pesticides in the country, it may be worthwhile to note that according to a 2011 study of over 15,000 samples of vegetables, fruits, spices, cereals, pulses, soil, animal feed, tea, honey, meat, egg and milk, residues were found in 6.8% of the samples and residues exceeded maximum residual limit in 1.2% of samples. Figure 118: Comparison of the results of the monitoring of pesticide residues in fruits and vegetables
Year Country India EU 2007 UK US-FDA India EU 2008 UK US-FDA 2009-10 2010-11 India India 2,309 1,046 6,353 7,232 49 (2.1%) 12 (1.1%) 102 (1.6%) 140 (1.8%) 2,139 672 6,031 60,805 66 (3.1%) 19 (2.8%) 137 (2.3%) 2,380 (3.9%) Samples analyzed 3,000 64,271 Above MRL 117 (3.9%) 2,843 (4.4%)
Source: Industry, Standard Chartered Research
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Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or mor e of its affiliates (together with its group of companies, SCB) and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing p rice for the business day prior to the date of the report, unless otherwise stated.
INR 332.88
Recommendation and price target history for Coromandel International
299.42
265.97 232.51
199.06
165.60 Feb-11
Date
May-11
Aug-11
Nov-11
Price target
Feb-12
Date
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Price target
Recommendation
Recommendation
Price target
Date
Recommendation
Source: FactSet prices, SCB recommendations and price targets
INR 216.75
Recommendation and price target history for UPL
194.95
173.15 151.35
129.55
107.75 Feb-11
Date
May-11
Aug-11
Nov-11
Price target
Feb-12
Date
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Price target
Recommendation
Recommendation
Price target
Date
Recommendation
INR
Recommendation and price target history for Rallis India
168.43
154.26 140.09
125.92
111.75 Feb-11
Date
May-11
Aug-11
Nov-11
Price target
Feb-12
Date
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Price target
Recommendation
Recommendation
Price target
Date
Recommendation
26 February 2014
85
INR
Recommendation and price target history for PI Industries
220.48
178.41 136.34
94.27
52.20 Feb-11
Date
May-11
Aug-11
Nov-11
Price target
Feb-12
Date
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Price target
Recommendation
Recommendation
Price target
Date
Recommendation
INR 543.25
Recommendation and price target history for Kaveri Seed
447.05
350.84 254.64
158.43
62.23 Feb-11
Date
May-11
Aug-11
Nov-11
Price target
Feb-12
Date
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Price target
Recommendation
Recommendation
Price target
Date
Recommendation
Recommendation Distribution and Investment Banking Relationships % of covered companies currently assigned this rating OUTPERFORM IN-LINE UNDERPERFORM As of 31 December 2013 Research Recommendation Terminology OUTPERFORM (OP) IN-LINE (IL) UNDERPERFORM (UP) Definitions The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next 12 months The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months 53.2% 35.2% 11.6% % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months 14.5% 12.8% 8.3%
SCB uses an investment horizon of 12 months for its price targets. Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent to scer@sc.com. Global Disclaimer: Standard Chartered Bank and/or its affiliates ("SCB) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections, and price target(s), if any, contained in this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediately following its publication. SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be sought for any queries relating to the legal or tax implications of any investment. SCB, and/or a connected company, may have a position in any of the securities, instruments or currencies mentioned in this document. SCB and/or any member of the SCB group of companies or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document and on the website or have a material interest in any such 26 February 2014 86
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l Equity Research l India | Emerging Companies l

India agriculture inputs

India agriculture inputs

Rallis India^ PI Industries^ Kaveri Seed^ UPL^ Coromandel International^

Important disclosures can be found in the Disclosures Appendix

Equity Research l India agriculture inputs

Equity Research l India agriculture inputs

Source: OECD-FAO, Planning Commission, Ministry of Agriculture, Standard Chartered Research

Equity Research l India agriculture inputs

Equity Research l India agriculture inputs

Yield Only road to food self-sufficiency

India foodgrain consumption (kt) CAGR 2.2%

Source: OECD-FAO, Planning Commission, Ministry of Agriculture, Standard Chartered Research

Source: Standard Chartered Research estimates

Equity Research l India agriculture inputs

Proportion of population in 15-59 age group

Equity Research l India agriculture inputs

There is ample scope for yields to improve

448 354 291 266 337 207 188

Source: OECD-FAO, Ministry of Agriculture, Standard Chartered Research estimates

Equity Research l India agriculture inputs

India arable land

Source: OECD-FAO, IMD, Standard Chartered Research

Equity Research l India agriculture inputs

Agro-inputs: Key beneficiary of reach for yield

Source: OECD-FAO, PlanningCommission, Ministry of Agriculture, Standard Chartered Research estimates

World 4.2 5.0 2.2 1.9 1.6 74.0 3.0

India 2.3 2.2 0.9 1.1 0.9 67.0 2.8

China 6.6 5.0 1.6 1.9 3.3 69.8 4.7

Equity Research l India agriculture inputs

Fertilizer market, INR 598 bn

Seed market, INR 113 bn

Source: Ministry of Agriculture, FICCI, Assocham, Companies, Standard Chartered Research

Equity Research l India agriculture inputs

Figure 15: Trend in the governments rural welfare scheme expenditure

Rural development - total disbursement

Average subsidy days receivables*

Equity Research l India agriculture inputs

Equity Research l India agriculture inputs

Pesticides: Domestic tailwind and huge export opportunity

Figure 19: Avoidable crop losses by key crop

0% Rice Cotton Sugarcane Potato Soybean

Equity Research l India agriculture inputs

Source: FICCI, Standard Chartered Research

Players: Bayer, Syngenta, PI, Rallis, Dhanuka, UPL, Coromandel

Equity Research l India agriculture inputs

Pesticides exports, especially custom manufacturing offers strong growth potential

Equity Research l India agriculture inputs

Figure 24: PI Industries CSM revenue

Access to innovator products High brand recall

Source: Company, Standard Chartered Research

Equity Research l India agriculture inputs

Brand and distribution driven market

Source: Standard Chartered Research

Equity Research l India agriculture inputs

Figure 27: Location of dealers surveyed

Chandigarh (2 dealers) Sirsa (4 dealers)

Hamirpur (1 dealer) Vadali (1 dealer)

Aurangabad (4 dealers) Nashik (1 dealer)

% of India's agriculture output

Bangalore (3 dealers) Mysore (1 dealer)

Source: RBI, Standard Chartered Research

Equity Research l India agriculture inputs

Figure 28: Brand performance ranking