India MidcapsINITIATING COVERAGE RALLIS INDIA Encashing emerging trends India Equity Research| Agriculture Rallis India (Rallis), a Tata Group company, is an established agrochemical player in India. The company, with market share of ~10% is well placed to capture emerging opportunities in the domestic agrochemical market on back of healthy distribution network, branded farm solutions and launch of new products. Acquisition of Metahelix has further equipped it to cash in on the spurt in the hybrid seed market riding the former’s formidable R&D capabilities and strong product pipeline. Additionally, its Dahej SEZ facility is expected to spur export sales and reduce dependence on the domestic market. We initiate coverage with ‘BUY’. EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth MARKET DATA (R: RALL.BO, B: RALI IN) CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : INR 120 : INR 158 : 168 / 111 : 194.5 : 23 / 430 Poised well to exploit emerging opportunities in agrochemical market Increasing consumption, rising minimum support price, sharpened government focus and mounting cost of labour will propel domestic agrochemical market to post 10-12% CAGR in the near term. The company has launched 10 products in FY12 (versus average three-four p.a) and this will help to gain market share in the near term. Further, the newly commissioned Dahej SEZ facility is anticipated to boost export sales, consequently reducing its domestic market dependence. Avg. Daily Vol. BSE/NSE (‘000) : 183.7 SHARE HOLDING PATTERN (%) Current Q2FY13 Promoters * MF's, FI's & BKs FII's others 50.1 8.9 10.8 30.2 50.1 11.5 11.9 26.6 : Q1FY13 50.1 11.8 11.6 26.4 Nil Metahelix to spur hybrid growth The organised hybrid seed market is expected to post 12-15% CAGR in the coming years. India has a dismal ~2mha of the total 40mha under hybrid seed in rice crop, thus leaving enough room for penetrating untapped markets. Post acquisitions of Metahelix, Rallis is well equipped to ride this surge armed with the former’s formidable R&D capabilities and robust product pipeline. * Promoters pledged shares (% of share in issue) RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months (3.8) 4.3 10.8 Stock (9.6) (21.0) 0.5 Stock over Sensex (5.8) (25.3) (10.4) Outlook and valuations: Poised for growth; initiating with ‘BUY’ Rallis is expected to post sales and PAT CAGR of 14.2% and 19.2% (FY05-12 CAGR of 11.6% and 23.9%), respectively, over FY12-15E. The company has a strong operating cash flow with a healthy RoE (20%-25%) and dividend payout ratio of ~35%. We value it at P/E of 15x FY15E (without considering positives i.e., land bank, strategic stake in Advinus, income from pulses initiatives). We initiate a `BUY’. Financials Year to March Net revenues (INR mn) Revenue growth (%) EBITDA (INR mn) Core profit (INR mn) Diluted shares (mn) EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROAE (%) FY11 10,862 21.1 1,915 1,258 194 6.4 (22.9) 18.6 12.0 27.0 FY12 12,749 17.4 2,126 1,224 194 6.2 (3.6) 19.2 11.0 22.9 FY13E 14,251 11.8 2,154 1,239 194 6.2 0.3 19.2 10.8 20.6 FY14E 16,492 15.7 2,615 1,660 194 8.3 33.0 14.4 8.6 23.9 Manish Mahawar +91 22 6623 3481
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[email protected] February 27, 2013 Edelweiss Securities Limited Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Agriculture Investment Rationale Wide network to widen consumer base further The INR80bn domestic agrochemical industry is expected to grow at 10%-12% CAGR in near term. According to the industry, the domestic agrochemical sector has shown a 10Yr CAGR (FY0110) of 7-8% and is worth INR80bn at present. Domestic agrochemical market is expected to grow at 10%-12% CAGR in the near term on the back of increasing consumption levels, rising MSP, better government focus and mounting cost of labour. In India, consumption of agrochemical is well below the global standards. Chart 1: Consumption pattern of Agrochemicals 21 17 (Per kg/Hectare) 13 8 4 In India, consumption of agrochemicals is well below global standards. 0 Taiwan China Japan USA Korea France UK Pakistan India Source: Company, Edelweiss research Rallis with a ~10% domestic market share is well-poised to capture emerging opportunities. It plans to double its farmer reach to 1.0mn in the next two years. Rallis has domestic market share of ~10% and is well placed to capture emerging opportunities on the back of healthy distribution network, branded farm solutions and launch of new products. Rallis is competing with Bayer Crop science and Syngenta, who are the largest players in India. Other competitors are United Phosphorus, PI Industries, Dhanuka Agritech etc. Rallis has 2500 dealers and 37000 retailers, covering 80%of India’s districts. Further, it uses 700 exclusive outlets of Tata Chemicals for marketing purpose and has extended its reach to 0.5mn farmers. Rallis plans to double the farmer reach over the next two years. The company has established a strong rapport with farmers through Rallis Kisan Kutumbha (RKK) that has extended support in crop protection, led to better yields and quality produce. New product launches to drive growth Rallis exited completely from toxic products as a conscious decision in FY12. Rallis is registering and launching new products on a continuous basis. The company has registered 63 products and launched 38 products during FY05-12 (usually, it launches 3-4 products/pa). Rallis discontinued a few products that had alternative products and less profitable. It has discontinued all red triangle (toxic) products in FY12 as a conscious measure. Rallis launched ten products in FY12 (v/s average 3-4 products/pa) which we believe, will drive the growth in the near term and help to gain market share. 2 Edelweiss Securities Limited Key revenue generating products ‘Applaud’ and ‘Takumi’ have come out of the ITI in FY11 and FY12. of products) 15 10 6 1 FY05 FY06 FY07 FY08 FY09 FY10 Launches Source: Company. 3 Edelweiss Securities Limited . Edelweiss research Innovation Turnover Index is expected to be back to normal range of 25%-30% as products launched during FY12 will drive up growth in near term. ITI was normally 25%-30% during FY05-10. index has fallen down substantially (including revenue from both the products turnover innovation index stood at 20% in FY12). We expect that ITI will be back to normal bracket of 25%-30% because products launched during FY12 will drive the growth in near term. Edelweiss research FY11 FY12 Registrations Chart 3: Providing Greener products 2001-02 Red 10% Green 30% Yellow 47% 2011-12 Red 0% Yellow 18% Green 7% Blue 36% Blue 52% Source: Company. respectively. Rallis defined its turnover from newly introduced products in the last four years to total turnover as ‘Innovation Turnover Index (ITI)’. (No. This will drive growth in the near term and help to gain market share. Hence.Rallis India Chart 2: New product registrations and launches 24 19 Rallis launched ten products in FY12 as against the annual average of 3-4 products. It has fallen down to 20% and 11% in FY11 and FY12. 0 14.0 26. The new plant would primarily cater to export market as the company is targeting higher export sales growth v/s domestic sales growth on the back of increased contribution from existing geographies and entry to newer market. Hence. Gujarat (SEZ) with the capex of INR1.8bn. Edelweiss research Dahej to boost exports further Dahej facility has potential to generate cumulative turnover of INR5bn over the next three years.0 8.0 32. In FY12. 4 Edelweiss Securities Limited . It will boost export sales and reduce dependence on the domestic market. Edelweiss research Table 1: Some of the Key Products Launched during FY10-12 Products Description Taarak Rice Herbicide Ergon A unique fungicide product which enhance the yield Ralligold Plant Growth Nutrients Toran Pesticide for Cotton crop Saaras Fungicide with collaboration of Syngenta Neon An effective insecticide for the management of cotton jassids and tea mites Sonic A granular insecticide for paddy and sugarcane Vaar Soyabean post emergence herbicide for the management of all major weeds Honcho Pre-post emergent herbicide for the management of all major weeds in Onion Cylo Post emergent herbicide for grassy weeds in rice Tata Bahaar Plant Growth Promoter (PGP) for vegetables and fruit crops to improve the growth and yield Source: Company. This plant will enjoy tax exemption for the initial five years and has a potential to generate cumulative turnover of INR5bn over three years.0 (%) 20. Rallis has set up a new pesticide plant of 5000MT/PA in Dahej. The Dahej facility will drive the export sales and reduce dependence on the domestic market.0 Key products ‘Applaud’ and ‘Takumi’ have come out of the ITI in FY11 and FY12.Agriculture Chart 4: Innovation turnover index 38. index has fallen down substantially FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company. Edelweiss research Metahelix – a growth ladder In December 2010. At present. which is big opportunity for the industry as well as for Rallis. millets & vegetable seeds. Rallis guided to achieve cumulative net sales of INR10bn in initial five years.000 5.02% during Q3FY13. going forward. Metahelix’s EBITDA margin is 5%-10%. 5 Edelweiss Securities Limited FY15E FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (%) .0 16. However.0 0. As per the agreement. Rallis will enhance its shareholding to 100% in Metahelix over a period of five years. India has ~2m ha (of total 40m ha) under hybrid seed in rice crop.0 24.0 32.e. at the time of acquisition.Rallis India Chart 5: Export sales and contribution to total sales 7. Organised hybrid seeds market is worth INR100bn (including vegetable seeds market size INR20bn) in India and is expected to post 12-15% CAGR in coming years. Rallis further increased its stake to 77.200 2.8bn in FY12/H1FY13. Further. It has strong R&D capabilities with ~70 scientists.4bn during FY11 i. and has a nationwide presence through its brand 'Dhaanya Seeds'. Metahelix boasts of a good product portfolio in paddy. Further. Area under rice hybrid seed is likely to reach 4-5m ha over the three-four years. Metahelix had sales of INR0. it is expected to be in the range of 15-20% on account of operating leverage.800 1.0 (INR mn) FY13E FY14E Source: Company.0 8. Seed business EBITDA margin is expected to improve on account of operating leverage. strong distribution network of Rallis and Tata Chemicals will accelerate the growth of Metahelix. the company increased its stake to 75.6bn. Metahelix has launched ten new seed hybrids and conducted extensive field activities in FY12 which is expected to support the strong growth trajectory in the near term. which is the next big opportunity for the industry as well as Rallis.5% in the Bengaluru-based seeds research company ‘Metahelix Life Sciences’ (Metahelix) in an ~INR1bn all-cash deal funded largely through internal accruals. Rallis entered into a definitive agreement to acquire a majority stake of 53.600 4. maize. Rallis guided to achieve cumulative sales of INR10bn in the initial five years from seed business. India has only ~2mha (of total 40m ha) under hybrid seed in rice crop. We believe that Metahelix is well positioned to capture the market due to strong R&D capabilities and product pipeline.64% at the end of FY12 and total investment increased ~INR1. going forward. It has already achieved sales of INR0. Metahelix is well positioned to capture the market due to strong R&D capabilities and product pipeline.400 0 40. 6 6. Edelweiss research (INR mn) 1.8 9.000 500 0 Into organic manure business Rallis guided to achieve cumulative sales of INR1bn in next five years from organic manure business.000 16. Acquisition would be funded through internal accruals.4 3.2 0.0 12. Company makes organic manure from waste of sugarcane mills and has brand ‘Geogreen’.0 FY11 Sales FY12 FY13E EBITDA FY14E FY15E EBITDA margin Source: Company.Agriculture Chart 6: Metahelix – Seeding growth 2. 6 Edelweiss Securities Limited (%) .3bn in April 2012.500 2.500 1. The company guided cumulative sales of Rs1bn in the next five years from the acquisition. Rallis entered into an agreement to acquire 51% stake in ‘Zero Waste Agro Organics’ for INR0. 3 25.4 14.18bn. Hence. provide them necessary agri-inputs and pay them higher prices (v/s MSP) for their produce.1 21.50bn (~24% of FY12 EBITDA) of EBITDA in the next five years.5 13.3 1.0 24.5 12.6 2.4 3.7 25.0 37.1 21. Edelweiss research Edelweiss Securities Limited 7 .5 37.3 26.1 19.5 19. we believe that even 1% margin for Rallis could generate INR0.1 11.3 12.2 1.1 11.8 26.4 80.0 15.7 11. Chana and Urad retailing under brand ‘I-Shakti’.2 11.1 1.5 10.0 52. As per media sources.6 11. We are initiating coverage on Rallis with ‘BUY’ rating.8 9.4 0.0 24. Company offers development services to pharma.3 2.0 1. agro and biotech industries.3 3.1 29.9 40.6 10.5 25.5 1.5 12.4 9.9 26.9 43.4 26. We believe both the property together could fetch ~INR3bn (~INR15/share or ~13% of CMP) Strategic stake in Advinus: Rallis has a ~14% stake in Advinus Therapeutics (Advinus). Rallis would encourage farmers to grow pulses. Tata Chemicals is targeting INR50bn of sales in the next five years from this initiative.7 8. retailing under brand ‘I-Shakti’ with Rallis.4 11. valuing the stock at P/E of 15xFY15E.6 9.4 24.0 14. Advinus is a research-based pharmaceutical company founded by leading global pharmaceuticals executives and promoted by the Tata Group. Rallis is trading at a premium to domestic peers and at par with global peers on account of • • • • Better financials Brand recognition Higher return ratio (RoE of 20%-25% ) Marketing synergy with Tata Chemicals (TCL). going forward too.5 1.8 13.9 13.4 10.8 27.9 20.4 14.3 10.Rallis India Valuations At current valuation.7 3.7 12.7 20.4 2.5 33.7 90.6 20.8 19. either in estimate or valuation.9 19.7 11. • Surplus land bank: Rallis has considerable surplus land which it can divest any time as per its requirement. Though.8 0. TCL has introduced four variants – Tur.9 5.7 1. We strongly believe that Rallis will trade at premium.1 9.5 1.7 9.1 Source: Bloomberg.9 8.7 2.2 18. the company is holding 110acres of land (85acres in Hyderabad and 25acres in Mumbai).6 5.8 2.3 12.9 18. we have not considered the positives listed below.4 0.9 5. with a total investment of INR0. Moong. • • Table 2: Peer Comparison Companies Domestic Players Rallis India PI Industries United Phosphorus Big Six Global Players Monsanto Syngenta Bayer BASF Dupont Dow Chemical Global Generic Players FMC Corp Nufarm (Global) EPS Growth (%) P/E (x) ROE (%) Mcap DPS D-Yield (USD bn) CY13/FY14E CY14/FY15E CY13/FY14E CY14/FY15E CY13/FY14E CY14/FY15E CY11/FY12 % 0.4 10.0 1.9 14.0 0.2 5.3 9.4 31.4 0.4 8.5 14.8 15.1 18.0 2.7 23.0 16. Income from pulses initiatives (with TCL): TCL has forayed into branded pulses. Agriculture Chart 7: One year forward P/E 200 20x 160 15x 120 Rallis is trading at lowest valuation of past three years (x) 10x 80 40 0 5x Dec-06 Aug-08 Dec-11 Oct-07 Apr-05 May-07 Nov-09 Apr-10 Chart 8: One year forward EV/EBITDA 250 200 150 (x) May-12 Sep-05 Feb-06 Sep-10 Mar-08 Feb-11 Oct-12 Jan-09 Jun-09 Jul-06 Jul-11 15x 100 50 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 10x 5x Chart 9: One year forward P/BV 250 200 150 6x (x) 4x 100 2x 50 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Source: Bloomberg. Edelweiss research 8 Edelweiss Securities Limited . Rallis India Key Risks Weather: Crop protection industry faces the risks of seasonal weather factors.0 16. Company.0 5.0) (17.0 (%) (6. Overseas regulation: Rallis is registering its products in the overseas market. The weather can affect the presence of pest infestations as well as affect the demand for crop-protection products. sales are highly seasonal. mainly during the monsoon. Hence. Edelweiss research Genetically modified (GM) crops: The usage of crop protection products is significantly less for GM crops.0) (28. In the domestic market. Any adverse change in the weather will have a negative effect on the sales.0) FY06 FY07 FY08 FY09 FY10 FY11 FY12 Monsoon % Departure Rallis Sales growth (%) Source: IMD. 9 Edelweiss Securities Limited . Any negative measure by the respective countries can affect the company’s growth adversely. growth and acceptance of GM crops by consumers may have an adverse effect on Rallis’ business. Chart 10: Correlation of monsoon v/s Rallis sales growth 27. Company has employee strength of 857 as on March 31. Rallis has broad and diversified product portfolio in terms of crops as well as type of pesticide. Agrochemical and seed business constitute ~94% and ~6% in consolidated FY12 sales. Edelweiss research According to customer engagement survey by Gallop. 2012 and have plants located at Akola. Company has 7 of the top 12 brands when it comes to awareness of brands in Indian agrochemical market. Ankaleshwar. Table 3: Strong Brands in Portfolio Brands Confidor Contaf Rogor Asataf Tata Mida Contaf Plus Fame Antracol Tata Mono Applaud Proclaim Hostathion Players Bayer Rallis Rallis Rallis Rallis Rallis Bayer Bayer Rallis Rallis Syngenta Bayer Source: Company. Chart 11: Standalone sales breakup (FY12) Fungicide 25% Chart 12: Consolidated Sales breakup (FY12) Seed 6% Insecticide 45% Export 30% Domestic 64% Herbicide 30% Source: Company. Ratnagiri and Bharuch.09% in Rallis India.Agriculture Company Description About Rallis India Rallis is a Tata Group owned Agrochemical Company and a key player in India. Company acquired Bangalore based seed players Metahelix during FY11 and entered into an agreement to acquire 51% stake in ‘Zero Waste Agro Organics’ in April 2012. Tata Chemicals holds 50. Edelweiss research 10 Edelweiss Securities Limited . Metahelix has management team with rich agricultural experience. It has strong R&D capabilities with ~70 scientists. Dhaanya Seeds markets farmer driven hybrids in major food crops such as rice. In vegetables. Nova Micronutrient Boron Range of specialty products Source: Company. the focused crops are tomato. fibre crop (cotton). USA Yara International Asa Brand/Products Furadan. Syngenta. Dhaanya Seeds is well supported by Metahelix’s world class infrastructure consisting of 20000sqft laboratory space and 24000sqft green house. Paralac. USA Syngenta Bayer Gharda Chemicals Makhteshim Chemical Works Borax. addressing varied crop protection needs. hot pepper (chilli). Sartaj Tata Mida. Ltd. These tie-ups enable it to offer a bouquet of specialty products. Anant. A large number of new hybrids are also under test in actual farming conditions for evaluation that would be ready for commercial launch in the next 12years. Atrazine. Bayer. among others. pearl millet. maize. sorghum. Tatafuran. Table 4: Details of alliances Players FMC. . Company has production operations in Karnataka. oil seeds (sunflower). Hybrid seeds and traits are commercialized by its wholly owned subsidiary— Dhaanya Seeds—that serves as a production and marketing organization for technologies developed by Metahelix. 11 Edelweiss Securities Limited . Electra. Koranda Captan. Fuji 1 Daksh.Rallis India Rallis has strong relationship with global majors and entered into several alliances such as Dupont. At present. brinjal. Prabhav. gourds and water melon. Spiro Fateh. Rekord Preet. Japan Dupont. A large number of new hybrids in these crops are also under test in actual farming conditions for evaluation that would be ready for commercial launch in the next 1-2years. Impeder Applaud. USA Nihon Nohyaku Co. Edelweiss research About Metahelix Lifescience Metahelix is an agricultural biotechnology company focusing on developing traits and technologies for crop production and improved productivity. Metahelix has launched ten new seed hybrids and conducted extensive field activities in FY12 which is expected to support the strong growth trajectory in the near term. Tamilnadu and Andhra Pradesh. Dr. Ravi has been responsible for new business initiatives and brings in considerable experience in marketing and business development. In his previous roles. Edelweiss research 12 Edelweiss Securities Limited . Gurgaon and earlier led the seed business at PHI Seeds Limited. Dr. Ravi was with Business Development Director group in E. Ravikrishna S. Narayanan. Before joining Metahelix. Dr. Source: Company. Nadig was a Senior Scientist in the Bioinformatics division of the Monsanto Research Center. DuPont India Private Limited.Agriculture Table 5: Metahelix‘s key personnel in management team Dr. Prior to joining Metahelix. Nadig is one among the founder members of Metahelix. Bangalore. K.K. Earlier Narayanan was the program lead for Crop Transformation and Functional Genomics at the Monsanto Research Center. One of the founder member of Metahelix and is in overall Managing Director incharge of company. Hyderabad. Bangalore and later on served as a consultant to Monsanto's Plant Genomics group at Saint Louis. Business Development and administrative function of the Company.. Director Nadig leads the Research and Development. He had also worked with Advanta India (previously ITC Zeneca Ltd) in different positions before leading the Marketing and Business Development function. Dr.I. Gautham Nadig. 13 Edelweiss Securities Limited .6 26.Rallis India Industry highlights Agrochemical Industry Global agrochemical industry has shown a 10-year CAGR (FY01-10) of ~4% and is worth USD45bn. Dow and Dupont. According to Cheminova (global generic crop protection player).0 47. BASF. Monsanto. While off-patented product based players are called as generic players.4 33. 45% of the generic market is still marketed by innovator companies. Syngenta. we believe that it will be an attractive opportunity for generic players in the future. Crop protection industry players are categorised into innovators and generics. patented products contribute only ~25% to the global crop protection market. Edelweiss research Agrochemicals are necessary to avoid large losses due to weeds. However. Chart 13: Global Agrochemical Industry 54.2 (USD bn) 40. Hence. Innovators are research & development patented product based players like Bayer. As per Philips McDougall report (2007). fungal diseases and insect infestations to crops. while balance market is off-patented (generics). 3050% of crops are saved by usage of spray globally.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Company. Generic players have a key strength of low-cost manufacturing and wide distribution network.8 20. Further. Edelweiss research Chart 16: Geography-wise global agrochemical market Rest of World 4% Asia 26% Europe 27% North America 21% Latin America 22% Source: United Phosphorus. 14 Edelweiss Securities Limited . 18%-20% of crops are saved on the back of crop protection usage in India. Further. domestic crop protection industry has shown a 10 year CAGR (FY0110) of 7%-8% and is worth INR80bn. Edelweiss research As per industry sources. paddy (rice) followed by cotton is major agrochemical consuming crop. Major agrochemical consuming states in India are from southern and western India belts.Agriculture Chart 14: Global patented and off-patented market Chart 15: Share of innovators in off-patented market Patented 25% Innovators 45% Generic Players 55% Off Patented 75% Source: Philips McDougall. arable land has been declining since the last four decades. declining arable land and shift from food to fuels. 15 Edelweiss Securities Limited .Rallis India Chart 17: State-wise pesticide consumption in India Others 20% Andhrapradesh 23% Tamilnadu and Kerala 6% Haryana 7% West Bengal 6% Gujarat 7% Punjab 12% Karnataka 7% Maharashtra 12% Source: Ministry of Agriculture. However. Edelweiss research Global as well domestic food demand has been driven by increasing population.1% CAGR (during 1960-2010) primarily on the back of yield improvement. Edelweiss research Chart 18: Crop-wise pesticide consumption in India Others 40% Paddy 35% Cotton 25% Source: Industry. In India. PI Industries. food production witnessed 2. despite having an absolute yield. Edelweiss research Edelweiss Securities Limited FY60 FY62 FY64 FY66 FY68 FY70 FY72 FY74 FY76 FY78 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 Source: Department of Agriculture. diversion from food to fuels. Hence. declining arable land and climatic problems are imposing supply-side pressures. seeds and irrigation facilities. which is much lower than the world. 16 FY60 FY62 FY64 FY66 FY68 FY70 FY72 FY74 FY76 FY78 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 Source: Department of Agriculture. crop protection products. Edelweiss research . we believe that the only solution to increase food availability is to improve agricultural yield that ensures strong trajectory for agricultural inputs like fertilizers. rising income in developing countries etc. Demand for food is growing consistently on account of rising population.Agriculture Chart 19: Stagnant India’s Arable Land 140 128 (m hecatres) 116 104 92 80 Chart 20: India’s food production 282 237 192 147 102 57 (m mt) India’s agricultural yield is rising with the same CAGR as the world. Further. 2 (mt / hectare) 2. Bayer Crop Science is biggest player in hybrid rice seed with domestic market share of 40%-50%. India has ~2mha (of total 40mha) under hybrid seed in rice crop.~3years) which plays big entry barrier.8 0. which is the next big opportunity for the industry.0 3. Area under rice hybrid seed is likely to reach 4-5mha over the next three to four years. Domestic seed industry is growing at the rate of 12% as compared to 6%-7% globally and is expected to post 12-15% CAGR in coming years.4 1. production – ~3years and commercialization .6 0. 17 FY60 FY62 FY64 FY66 FY68 FY70 FY72 FY74 FY76 FY78 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 World's Yield India's Yield Source: USDA.0 Seed Industry Indian seed industry is the eighth largest in the world and market size is estimated to be INR80-100bn (including vegetable seeds market size INR20bn). Edelweiss research Edelweiss Securities Limited . Of this. Nuziveedu Seeds is largest player in hybrid cotton seeds with 25% market share followed by Rashi Seeds and Myhco.Rallis India Chart 21: Agricultural yield 4. domestic cotton seed market is worth INR40bn and is expected to be same over the next two to three years on account of declining cotton acreage in India. Seed Industry has a long business cycle of 13-14years (R&D – ~7years. Department of Agriculture (India). Edelweiss research 18 Edelweiss Securities Limited .Agriculture Chart 22: Indian seed industry crop-wise Others 40% Cotton 40% Vegetable and fruits 20% Source: Kaveri Seeds. 1%). Edelweiss research Chart 24: PAT Growth 2. Chart 23: Strong revenue growth to continue 22.Domestic Agrochemicals . We are considering 4%/12%/12% domestic agrochemical business growth during FY13/14/15 (FY09-12 CAGR of 13.Export Seeds Organic Manure Source: Company.000 (INR mn) 13.500 1.6% and 23. to be driven by new products.000 (INR mn) 1.Rallis India Financial Outlook Healthy financials.500 9.2%.500 2. Rallis domestic business has shown de-growth of 2. and the growth in Metahelix seed business.000 4. primarily on account of volume growth that we expect. dividend payouts We expect Rallis’ net sales and PAT to grow FY12-15E at CAGR of 14.2% and 19.500 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Agrochemicals .9%) on the back of higher growth in export sales. Edelweiss research 19 Edelweiss Securities Limited . During FY12.500 18.000 500 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Source: Company. respectively (v/s FY05-12 CAGR of 11.2% YoY primarily on account of discontinuation of red triangle (toxic) products and adverse weather condition. which would be supported by the new facility in Dahej. The company has healthy RoE (20%-25%) and strong dividend payout ratio of ~35%. Rallis has shut down its Turbhe.6bn) and higher working capital requirement (INR0.6% in FY11 and 16.3x in FY12) because company has made substantial investment by way of setting up plant in Dahej (~INR1.4% in FY10 on the back of product optimization and internal initiatives.0 (%) FY13E FY14E 2. though it has come down to 17.7% during FY12 on account of higher input cost.Agriculture The company has improved its EBITDA margin from 11.500 900 300 EBITDA EBITDA margin Source: Company. We have not considered any benefit or margin improvement led by cessation of Turbhe facility. We are considering flat consolidated EBITDA margin over FY12-15 despite margin improvement in seed business led by operating leverage.0 15.3% in FY05 to 19.5bn in FY12 (DER from Nil in FY10 to 0.0 5. 20 Edelweiss Securities Limited FY15E FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 . Edelweiss research Ralls’s gross debt increased from INR0. On account of cessation.0 0.0 20.8bn). Mumbai plant and shifted its production to new Dahej facility.300 2.100 1. This would lead to a lower debt in the near future and reduce interest outgo. Chart 25: EBITDA and EBITDA margin 3. Hence.1bn in FY10 to INR1. acquisition of Metahelix (~INR1.8bn in FY11 and FY12). the company has given voluntary retirement scheme to its employees and we believe that there will be cost saving pertaining to cessation of Turbhe facility. We believe there is no major capex likely in the near term as recent initiatives are seen increasing cash-flows. it will be upside risk to our margin assumption.0 10. sales of low margin products led by erratic rain and contribution of lower margin seed business.700 (INR mn) 25. 8 4.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Dividend Payout Source: Company.Rallis India Chart 26: RoE (%) and Pretax RoCE (%) 60.0 0.0 (%) 24.0 75.0 48.2 57.0 36. Edelweiss research Chart 27: Consistent dividend history 93.0 12.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E RoE Pretax RoCE Source: Company.6 21.4 (%) 39. Edelweiss research 21 Edelweiss Securities Limited . 5 54.0 33.4 2.0 52.7 600 1.0 20.6) FY13E 11.3 FY14E 15.0 NA 59.1) 1.7 25.3 194.153 6.5 6.0 15.2 24.0 57.3 36.5 47.074 4.3 10.091 2.0 20.851 208 70 1.8 FY12 41.046 194.2 9.9 (2.8 5.7 21.9 0.3 6.8 6.288 112 74 2.292 3.5 4.0 FY15E 15.0 30.5 10.5 6.0 2.4 11.0 35.713 474 1.5 6.0 1.121 0 2.1 13.242 26 1.4 31.1 18.799 40 77 2.017 3.4 34.195 2.660 0 1.251 16.749 14.8 2.224 (217) 1.5 30.836 716 2.535 4.5 16.8 1.6 5.5 6.8 7. gross block Interest rate as % of avg.8 10.5 8.8 54. growth (%) Export revenue growth (%) Seeds revenue growth (%) Organic manure rev.810 1.9 13.215 194.2 194.0 35.0 12.768 544 1.6 14.9 FY14E (INR mn) FY15E 12.5 18.2 7.2 600 678 35 118 166 (13) FY15E 7.5 7.0 NA 59. rate as % of avg.3 27.522 1.6 FY13E 40.0 6.840 141 69 1.2 0.8 8.8 15. grw.8) (2.7 FY14E 40.2 FY12 7.613 194.7 10.0 26.0 6.1 9.2 7.9 7.729 925 2.0 15.2 35.2) 49.0 25.5 8.3 10.660 48 1.2 600 (390) 35 120 166 (11) Income statement Year to March Net revenues Raw material costs Gross profit Employee expenses Other expenses Operating expenses Total expenditure EBITDA Depreciation & amortisation EBIT Interest expense Other income Profit before tax Provision for tax Core profit Extraordinary/ Prior period items Profit after tax Minority interest Profit after minority interest Equity shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS DPS Dividend payout (%) Common size metrics (% net revenues) Year to March Gross margin Operating expenses EBITDA margins EBIT margin Interest Net profit margin Growth metrics (%) Year to March Revenues EBITDA PBT Net profit EPS FY12 17.8 0. (%) Raw Material Cost as % Net Revenue Employee expenses as % Net Revenue Other Expenses as % Net Revenue Deprec.5 8.8 1.7 26.1 FY15E 41.4 13.126 287 1.5 8.0 6.429 30 123 195 (42) FY13E 5.0 NA 58.0 12.250 590 1.2 9.422 32 121 175 (22) FY14E 6.0 6.522 5.3 (3.321 902 2.3 7.121 75 2.428 5. gross debt Tax rate as % of PBT Capex (INR mn) Net borrowings (INR mn) Receivable (days) Inventory (days) Payable (days) Cash conversion cycle (dayes) 6.963 9.Agriculture Financial Statements Key assumptions FY12 Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Domestic rev.0 (3.097 13.5 12.2 11.9 18.2 18.706 1.7) (3.5 324.6 5.7 24.7 14.654 3.2 25.156 357 2.239 3 1.5 23.575 2.154 303 1.650 3.6 5.1 15.5 194.786 11.7 26.877 15.0 58.007 15 992 194.1 16.807 22 Edelweiss Securities Limited .2 194.622 12.119 3.0 27.7 2.4 FY13E 8.5 6.492 18.4 28.4 1.5 10.615 327 2. 108 7.8 FY13E 6.7 1.3 1.0 14.4 Profitability ratios Year to March ROACE (%) ROAE (%) Receivables (days) Inventory (days) Payables (days) Cash conversion cycle (days) Debt-equity (x) Debt/EBITDA Adjusted debt/Equity (x) FY12 28.488 4.9 18.677 5.8 12.2 1.7 19.6 FY15E 25.4 FY14E 2.4 8.1 18.289 48 356 535 891 232 8.533 487 30 213 3.3 7.9 35 118 166 (13) 0.0 6.453 507 946 466 480 FY13E 1.1 FY15E 33.0 4.217 28 Market cap (USD bn) 0.8 5.222 26 856 735 1.4 2.072 4.541 131 7.881 9.991 1.4 11.2 3.336 5.358 8 6.9 3.610 Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield(%) FY12 6.5 25.426 25 300 4.688 8.591 232 8.8 11.940 71 1.4 FY13E 1.210 (600) 177 (600) (569) (361) (1.010 Total current liabilities & provisions Net current assets (ex cash) Application of funds Book value per share (INR) Free cash flow Year to March Net profit Add: Depreciation Add: Interest and other non-cash items Gross cash flow Less: Changes in working capital Operating cash flow Less: Capex Free cash flow Peer comparison valuation Name Rallis India PI Industries United Phosphorus 1.071 32 FY14E 194 7.4 2.840 1.009 (591) 57 (301) (523) FY14E 1.028 6.6) 7.4 10.613 327 0 1.6 6.7 0.5 26.0 1.072 45 (INR mn) FY12 992 287 175 1.2 1.4 0.0 0.612 25 599 4.1 6.459 37 (INR mn) FY15E 194 8.4 FY15E 2.7 0.0 FY15E 10.518 509 1.9 26.4 3.2 (3.869 (600) 44 (600) (546) FY15E 2.5 20.358 8 7.386 1.909 25 300 4.4 2.337 4.9 4.6 10.7 4.717 1.685 1.8 1.617 8.930 1.479 1.5 35 120 166 (11) 0.6 32 121 175 (22) 0.9 25.234 1.3 33.8 2.225) (1.2 4.4 8.8 2.9 30 123 195 (42) 0.533 487 30 390 3.260 1.748 1.269 FY15E 2.729 1.459 4.0 Cash flow metrics Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid FY12 946 (239) (740) (34) (466) (473) FY13E 1.3 FY13E 25.236 1.436 3.403 193 2.183 25 300 4.406 1.533 197 30 112 2.0 Diluted PE (X) FY14E FY15E 14.Rallis India Balance sheet As on 31st March Share capital Reserves & surplus Shareholder equity Minority interest Long term borrowings Short term borrowings Loan funds Deferred tax liability/asset Sources of funds Tangible assets Intangible assets CWIP (incl.9 FY14E 8.9 11.8 19.095 7.210 600 1.215 303 1.3 0.1 Operating ratios (x) Year to March Total asset turnover Fixed asset turnover Equity turnover FY12 1.766 75 0 0 0 232 9.950 1.6 2.2 3.1 0.795 2.9 5.6 5.508 1.0 0.3 0.009 301 708 FY14E 1. intangible) Total net fixed assets Goodwill on consolidation Non current investments Current investments Cash and cash equivalents Inventories Sundry debtors Loans and advances Other assets Total current assets (ex cash) Trade payable FY12 194 5.3 0.680 FY13E 194 6.5 23.0 10.7 1.046 357 0 2.2 4.9 Source: Edelweiss research 23 Edelweiss Securities Limited .287 3.0 2.2 0.178 1.0 EV/EBITDA (X) FY14E FY15E 8.572 8.433) Other current liabilities and provisions 1.217 3.035 1.358 8 5.3 22.358 8 5.869 600 1.533 487 30 169 2.071 3.118 2.3 FY14E 29.330 4.530 14 856 685 1.4 ROAE (%) FY14E 23.751 1. Yoginder K.87 3. Bharat Vasani Mr. Holding 1. Rastogi Mr. B. Homi R.00 0. Thorat Chairman Director Director Director Director Director Mr.03 1. Venkatrao S.P.P. Alagh Mr.04 Reliance Capital Asset Management Oriental Insurance Co Argonaut Ventures Amundi Luxembourg SA Blackrock Group Perc. R. Holding Amansa Investments Fidelity Mutual Fund Sundaram Asset Management L&T Investment Management UTI Asset Management 3.47 1. E.Deloitte Haskins & Sells *as per last available data Holding Top -10 Perc. Prabhakaran Nair Mr. Prakash R. Kshirsagar Mr. Benerjee Mr.A. Sohoni Mr.00 1. Y.74 1. Khusrokhan Mr. K.01 1.S. R.D.Agriculture Additional Data Directors Data Mr. V.77 0.76 *as per last available data Bulk Deals Data No available data Acquired / Seller B/S Qty Traded Price *as per last available data Insider Trades Reporting Data 05 Mar 2012 05 Jun 2012 Acquired / Seller Tata AIG Life Insurance Company Ltd Rakesh Jhunjhunwala B/S Buy Buy Qty Traded 49732 952000 *as per last available data 24 Edelweiss Securities Limited . Gopalakrishnan Mr. Shankar Director Director Director Director Director Managing Director & CEO Auditors . Mukundan Mr. Shree Renuka Sugars.khemani@edelweissfin. United Phosphorus Recent Research Date 26-Feb-13 Company Agrium Title Price (INR) Recos Not Rated 610 Buy Not Rated Uncertainty clouds Indian nonurea fertiliser outlook.com nischal. Jain Irrigation. Rallis India.Rallis India Edelweiss Securities Limited. Email:
[email protected]. Result Update 19-Feb-13 05-Feb-13 PI Industries PotashCorp Domestic challenges to stay. Board: (91-22) 4009 4400.sheth@edelweissfin. PI Industries.com +91 22 2286 4206 +91 22 4063 5476 +91 22 4040 7499 Coverage group(s) of stocks by primary analyst(s): Agriculture EID Parry India. Road. Kalina.com Vikas Khemani Nischal Maheshwari Nirav Sheth Head Institutional Equities Co-Head Institutional Equities & Head Research Head Sales vikas.T. Global Pulse Stellar performance. off C.maheshwari@edelweissfin. Global Pulse Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * . 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