Agrochemical Sector IC Feb 14 Eisec PDF

Institutional Research
Agrochemical Sector Report

February 4, 2014
Tag Line
Sageraj Bariya
Agrochemical Sector Report sagerajb@eisec.com 022-61925337
1
Initiating Coverage - Rallis India Ltd, UPL Ltd & Bayer CropScience Ltd
February 4, 2014
Contents
Executive Summary ……….....................................................................................................................................................………….. 3
Are generic players gaining share or are innovators exiting? ..............…...........................................................................…..…….. 10
Slowing rate of new molecule introduction ..............…......................................................................................................…..…….. 10
Changing Business Model - Focus shifting from Agrochemical to Seed ..............…................................................................…….. 11
Is cost of inventing seed lower than agrochemicals? ..............…............................................................................................…….. 12
Future Outlook ………………………………………..................................................….....................................................................…..…….. 13
Key Challenges …….…………………………………..................................................…....................................................................…..…….. 13
Companies Covered
Rallis India Ltd ……………………………….............................………………………………………………................................…..........……………. 17-30
UPL Ltd ……………………………………………………………....................………………………………................................….........…………………… 31-42
Bayer CropScience Ltd ……………………………………………………....………………………………................................….........………………...… 43-50

2
Agrochemical
Institutional Research Sector Report
February
Domestic 4, 2014
market on strong footing, Seed holds future
Executive Summary
The Indian Agrochemical Industry is estimated to be worth US $3.8 bn (~Rs have been outsourcing from china to the extent of 80-95% of their requirement
210 bn) at the end of CY2012. India accounts for 3.8% of global agrochemical and are looking for geographic diversification.
industry. Even though Global agrochemical market grew by 6.5% in 2012, Indian Global Industry shifting to seed - Globally there has been shift in business
agrochemical industry is estimated to have recorded lower growth in 2012-13. model, from Agrochemicals to Seed. Given agrochemicals are last component
On a country level, the rainfall during the season (June-September-2013) came that goes into farmer's investment chain, it faces lot of uncertainty. Another
in at 106 % of long term average. There has been loss of sale on account floods advantage seed offers is considerable pricing power to company. Performance
and cyclone. But, these are near time concerns. We believe there is immense of saved seed is substantially lower compared to original. Farmers have to buy
potential for incumbent dominant players on account of 1) low penetration new seed for every season from company, in turn giving pricing power to
level of agrochemicals 2) low market share of organized player 3) fragmentation company.
of organized market 4) low cost manufacturing destination and 5) Global
agrochemical majors looking at diversifying sourcing requirement. Seed the next growth frontier - Total Global Seed sales post CAGR of 8.8% and
subset GM/Hybrid seeds posted CAGR of 19.6%. India Seed industry is
Low penetration level of agrochemicals - India's consumption of agrochemical estimated to be worth Rs 80 bn-100 bn (US $ 2 bn) and is 6th largest in the
is one of the lowest in the world, standing at 0.6kg per hectare. This compares world. Indian seed industry is growing at 12-13% p.a. and the commercial seed
very poorly with other countries that have less arable land under coverage. For segment accounts for a mere 25% of the total market. SRR is the percentage of
instance, countries like Taiwan, Japan and Korea have higher consumption than area sown out of total area of crop planted in the season by using certified/
India. We believe this again highlights the under usage of agrochemicals by quality seeds/cultivars other than the farm saved seed. On country level SRR
Indian farmers and unexploited opportunity at bay for the agrochemical stands at 25.9%, indicating huge opportunity for organized industry.
companies.
Patent expiry of molecules - Agrochemicals are protected by patents to
Unorganized still dominate market - Indian agrochemical market compared to encourage innovation akin to the Pharmaceutical industry. Going ahead,
global is highly fragmented and generic in nature. Over 80% of market is molecules worth US$ 5.2 bn are likely to go off patent throwing the market
dominated by non-patented molecules and Top-4 players' control roughly 27% open for generic players.
of total market while 50% of market is served by unorganized players. That is
where, we believe that major players are in a position to gain higher market
share as well as charge a premium for its products. Key Challenges
Contract Manufacturing huge opportunity - Global agrochemical companies Lack of innovation due to high cost - As per study on average to develop new
have been reducing manufacturing capacity of low value products to molecule it costs 10-years and Rs 10 bn. Indian companies are yet to focus on
concentrate on higher-value products. Conversely, they are maintaining their innovation due to high R&D cost.
strong hold on off-patent Active Ingredients (AI) through outsourcing the same. Dominance by unorganized player & risk of fake products - Indian agrochemical
For example, Germany's BASF has cut its range of AI from 300 in 2001 to 130 in industry is almost 50% controlled by unorganized industry.
2006. Syngenta has also reduced its portfolio from 120 to 80. Bayer CropScience
Biotech seeds threat to agrochemicals - Scientific research has come up with
reduced its portfolio by 29 actives between 2000 and 2006. This in turn is driven
seeds that have self-immunity towards natural adversaries. This can be a
by 2 major events (1) Japanese companies on account of natural calamities are
potential threat to the business of agrochemicals.
looking at de-risking their manufacturing base (2) US & EU agrochemicals major

3
February 4, 2014
The Basics Size & Scale - Global & India

Agrochemicals are used to improve crop performance, yield or control pests, Global Agrochemical industry has grown at an average rate of 6.2% over CY2002-
etc. As per Rallis India annual report, value of crop losses caused due to non- 12 to US$ 53.7 bn. For CY2012, the industry registered a growth of 6.9% yoy
usage of pesticides was around Rs 1 trillion, accounting for approximately 1% compared to 13.8% growth witnessed in 2011. Global agrochemical sales are
of India's GDP (FY2012). Agrochemicals are the last input in any agricultural expected to register a CAGR of 6.7% over 2012-18 to US $ 80 bn.
operation that protects all the other inputs as significant investment are already
committed by then. It is estimated that India food grain production can be Year Crop Protection (US $ mn)
increased by 33% to Rs 4 trillion by use of Agrochemicals. 2002 29,420
2003 31,155
Investment chain of farmer 2004 35,400
Agrochemicals 2005 36,095
2006 35,575
2007 38,755
Fertiliser
2008 46,130
2009 43,720
Labour 2010 44,195
2011 50,305
Seed 2012 53,732
Source: Eisec Research, Industry
Land
6.7%
100
80
Losses caused by different pests -FY12 6.2%
75
Rodents & 54
Others, (US bn)
15% 50
Weeds, 33%
29
Diseases, 25
26%
Insects, 26% -
2002 2012 2018E
Source: Eisec Research, Industry Source: Eisec Research, Industry

4
February 4, 2014
Global Agrochem sales by region

On the other hand, the Indian Agrochemical Industry is estimated to be worth RoW
US $3.8 bn (~Rs 210 bn) at the end of CY2012. India accounts for 3.8% of global 4%
agrochem industry. Even thought Global agrochemical market grew by 6.5% in
2012, Indian agrochemical industry is estimated to have recorded low growth
Lat-Am N.America
in 2012-13. Low growth was on account of 1) Delayed season in western, central
19% 23%
and south central part of India leading to delay in sowing of key crops (like
cotton and paddy) across impacted region. 2) Harvesting of rice in AP was
impacted by Neelam Cyclone. 3) Rabi season witnessed low pest and disease Asia EU
occurrence in key crops, especially paddy and pulses. 4) Area under cultivation 25% 29%
of key crops like cotton, paddy and coarse cereals was lower than last year
leading to drop in demand for agrochemicals.
Key Markets and Consumption Global Pesticides consumption (Kg/ha)

North America and EU have been early promoters and adopters of agrochemical;
hence they dominate overall market of global agrochemical sales with share of 20
17
23% and 29% respectively. Asian region is 2nd biggest with a share of 25%,
followed by Lat-Am with 19% and Rest of the World having 4% share. 15 13
12
(Kg / ha)
Developed markets like US & EU are almost matured ones and hence future
growth is likely to be very low and stable. Also we believe there has been 10
7 7
underlying shift towards GM/Hybrid seed by market in those markets (discussed 5 5
ahead in more detail). 5
0.6
0
Taiwan China Japan USA Korea France UK India

5
February 4, 2014
Pesticides Classification and Market share - Global and India

India's consumption of agrochemical is one of the lowest in the world, standing Agrochemicals are classified as Insecticides, Herbicides and Fungicides.
at 0.6kg per hectare. This compares very poorly with other countries that have Individual sales of various categories however depend on climatic conditions
less arable land under coverage. For instance, countries like Taiwan, Japan and and crop.
Korea have higher consumption than India. We believe this again highlights
the under usage of agrochemicals by Indian farmers and unexploited Globally herbicides dominate (44%) the consumption, while in India it stands
opportunity at bay for the agrochemical companies. India accounts for 16% of at 16%. Insecticides dominate Indian market with share of 65%, against global
the world's total food grain production and uses only around 2% of average of 22%. This dichotomy is on account of climatic conditions, hence
agrochemicals. Low consumption can be attributed to: a) fragmented land insecticides are more prevalent in Asian countries.
holdings- low purchasing power, b) high dependence on monsoons and low Increased usage of GM/Hybrid seeds by North America has also led to reduction
level of irrigation, c) low awareness among farmers about the benefits of using in consumption of insecticides.
pesticides and d) lower accessibility of products.
In India, Andhra Pradesh (AP) is the largest consumer of pesticides, with a total Global v/s India Share of Pesticides Consumption - 2012
share of around 24%. Top-3 states (AP, Maharashtra and Punjab) consume
48% (49% in 2001) of country's total agrochemical consumption in 2012. While Global India
Top-8 states consumed 77% of total agrochemical sold in India in 2012 compared Others, Others,
7% Herbicides, 4% Herbicides,
to 81% in 2001. If one compares the consumption pattern of CY2001 with 44% 16%
CY2012, contribution from other states (Non Top-8) has increased from 17% to Insecticides,
23%, indicating increasing penetration in other states. 22%
Fungicides,
15%
State-wise Share of Pesticides Consumption trend
28%
21%
Fungicides, Insecticides,
27% 65%
14%

7%
0%
AP PJB MS GUJ KNTK HRY W.Ben TN Others
2001 2006 2012

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February 4, 2014
Largest selling molecule category wise - Global India's changing Pesticides consumption pattern
Product category Top molecule - Global India has predominately been an insecticides market due to its tropical climate
Herbicides Glyphosate, Triazines, Sulphonyl urea and availability of cheap labour (replacement for herbicides). However, over a
Insecticides Pyrethroids,Organophosphates,Neonicotenoids period of time, there has been a minor, but certain shift in demand towards
Fungicides Triazoles, Strobillurin, Dithiocarbamates fungicides and herbicides.
India’s Changing Pesticides Consumption Pattern

Largest selling molecule category wise - India
80% 72%
Product category Top molecule - India 67% 65%
Insecticides Acephate, Monocrotophos, Cypermethrin
Fungicides Mancozeb, Copper Oxychloride, Ziram 60%
Herbicides Glyphosate, Isoproturan,
Bio-pesticides Spinosyns 40%
Others Zinc Phosphide, Aluminium Phosphide
Source: Eisec Research, Industry 18% 15%
20% 16% 16% 15%
12%
4%
0%
2002 2007 2012
Herbicides Fungicides Insecticides Others

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February 4, 2014
Key consuming crops

Globally, fruits & vegetables and cereals are the largest consumer of Crop % of total area under % of total agrochem
agrochemicals. In case of India Cotton and Paddy consumes highest with 50% cultivation consumption
and 18% share respectively. Cotton 5% 50%
Rice 24% 18%
Key consuming crops Fruits & Vegetables 3% 14%
Plantation crops 2% 8%
Global Sugarcane India cereals, millets and oilseeds 58% 7%
2% Others
Soyabean Cereals 1% Source: Eisec Research, Industry
10% 7%
Plantation Market Structure, Competition and Players
crops
Fruits & 8% Globally agrochemical market is fairly consolidated and few large players control
Others
Vegetables the market. Top-6 Innovator players (Syngenta, Bayer, BASF, Dow, Monsanto
26% Fruits &
18%
Vegetables Cotton
and DuPont) control 67% of total agrochemical market. If one were to include
14% 50% top-4 generic players too, market share would amount to 86%.
Rice
Cereals
9%
18% Rice
Maize 18% Total market - US$
13% 54bn
Cotton
6%
Sales of Total 6 Cos-
Source: Eisec Research, Industry US$ 36bn
12,000
There is dichotomy when one compares particular crops area under Sales of generic Top-4 Cos -
9,000 US$ 10bn
cultivation and share of total pesticides consumption. Like cotton
(US$ mn)
covers 5% of total area under cultivation, however it consumes 50% 6,000

of total pesticides sold in country. Similarly cereals and oilseeds cover
58% of total area under cultivation, but consume only 7% of total 3,000
pesticides. This again highlights gross under penetration of
agrochemicals in Indian market. -
Sumitomo
Monsanto
UPL
BASF
Dow
Syngenta
MAI
Bayer
Others
DuPont
Nufarm

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February 4, 2014
Indian agrochemical market compared to global is highly fragmented and In order to counter competition from generic and unorganized sector, top
generic in nature. Over 80% of market is dominated by non-patented molecules companies have opted for strategy of (1) Larger product catalogue/offering of
and Top-4 players' control roughly 27% of total market while 50% of market is agrochemical (2) Diversify into agri related business - seed & seed treatment,
served by unorganized players. plant growth nutrient, agriculture equipment and other agri related services.
Company Insecticides Herbicides Fungicides Others

Indian agrochem market
BASF India Seed treatment
Bayer Crop science Ltd Seed treatment, plant growth regulators
Dhanuka Agritech Limited PGRs, Surfactants
Dow AgroSciences India Pvt. Ltd. Plant Growth Regulator
Other Players DuPont Growth Enhancer
23% Excel Crop Care Limited Seed treatment, Home & Garden
Gharda Chemicals Ltd. Plant growth Regulator
Unorganized
50% Meghmani Organics Limited Pesticide Intermediates
Monsanto India Ltd. Seeds
Nagarjuna Agrichem Limited Fertilizers, Micro Nutrients, Liquid Fertilizers,
Top-4
27% PI Industries Ltd Speciality Products
Rallis India Rodenticides, Seed treatment, Agri services
Syngenta India Seed treatment
Source: Eisec Research, Industry United Phosphorous Limited Fumigants, Rodenticides

According to Pesticide Monitoring Unit of GoI, there are about 125 technical
grade manufacturers, more than 800 formulators and over 145,000 distributors
in India in FY12.

9
February 4, 2014
Trend Slowing rate of new molecule introduction

Are generic players gaining share or are innovators exiting? - Share of generic There has been visible drop in rate of introduction of new agrochemical / crop
has been increasing continuously over last decade. Share of generics have protection molecule over past 2 decade. Given low consumption rate in
increased from 36% in 2004 to 40% in 2006 to 52% in 2011. This begs question developing countries, it offers strong growth opportunities. Given ~50% of
whether generic companies are gaining upper hand and managing to increase market is growing at reasonable pace, Agrochemical companies ought to spend
their market share or Top-6 Innovators players are exiting the agrochemical more on agrochemical R&D. However that doesn't seem to be the case, as
business. visible from declining rate of introduction of new molecule.
New Active Ingredient Introductions
Declining Marketshare of Innovators 24
100%
18
36% 40%
75% 52%
12
50% 33% 32% 6

25%
25%
31% 28% 0
23%
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0%
2004 2006 2011 Agrochemical Active Ingredients in Development
Proprietary Proprietary off patent Generic 80
60
40
20
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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February 4, 2014
Changing Business Model - Focus shifting from Agrochemical to Seed R&D Expenditure of Leading Agrochemical Companies
Increasing market share of generic and slowing rate of new molecule 3600
introduction point to distinct shift in strategy followed by Top-6 Innovator
companies. This is visible in changing business model, wherein R&D spend on 2700
Seed has grown at higher rate compared to Agrochemical.
(US $mn)
1800
R&D Expenditure – Historical development
600
2001 900
R&D expenditure US $mn
450
0
300 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Agrochemical R&D Seed and Trait R&D
150 Source: Eisec Research, Industry
0 There has been marked increase in cost of innovation and bringing new molecule
Monsanto DuPont Syngenta BASF Dow Bayer
to market over period. A single new molecule required spent of US$ 152 mn in
Agrochemicals Seed and Traits 1995 that grew by 21.1% to US$ 184 mn in 2000 and 39.1% from there to US$
256 mn in 2008 (CAGR - 4.1% from 1995)
1600
2011
1200 Cost of Bringing a New Product to Market
R&D expenditure US $mn
280 256
800
400 210 184

152
(US$ mn)
0 140
Agrochemicals Seed and Traits 70

0
On aggregate basis, global industry R&D spends on Seed has surpassed that of 1995 2000 2008
agrochemicals. Source: Eisec Research, Industry

11
February 4, 2014
Is cost of inventing seed lower than agrochemicals? Time from New Product Inception to First Introduction
If one were to believe there has been change in business models of Top-6 16
innovator players from agrochemical to seed, one needs to understand
economics of inventing better seed. Studies show cost of inventing new plant 12
traits/seed are lower than agrochemical.
8
Year
Cost of Bringing a New Product to Market
4
280 256
0
1995 2000 2005 -08 2011
210
Agrochemical Seed
(US$ mn)
136
140
Investment chain of farmer
70 Agrochemicals
0 Fertiliser
Agrochemical Plant trait
Labour
As per industry, cost of inventing new plant trait/seed is in region of US$ 136mn,
while that for agrochemical is US$ 256 mn. However, if one were to look at
average time needed for new product introduction, it stands at 10 years for Seed
agrochemical and 13 years for seed. This raises another question, if old adage
of "Time is Money" holds true, then why would company invest in seed
Land
compared to agrochemical.

12
February 4, 2014
Future Outlook Key Challenges

Low penetration of pesticides: Estimated size of the Indian economy is US $ 2 Lack of innovation due to high cost: As per study on average to develop new
trn of which Agriculture accounts for 18%. The Agrochemical industry's size is molecule it cost 10-years and Rs 10 bn. Indian companies are yet to focus on
estimated US $3.8bn (~Rs210 bn), evenly split between organized and innovation due to high R&D cost.
unorganized at the end of CY2012. Organized industry represents 0.1% of the Dominance by unorganized player & risk of Fake products: Indian agrochemical
country's total GDP and 0.5% of Agriculture GDP. India's pesticide consumption industry is almost 50% controlled by unorganized industry. Many of them sell
stands at abysmally low rate of 0.60kg/ha as compared to the global average fake products and thus giving bad name to overall agrochemical industry. This
of 3 kg/ha. We believe this demonstrate the gross under penetration of creates biggest hurdle for organized player to sell idea of agrochemical to
agrochemical and the opportunity that is available to the companies in the farmers.
Sector. Biotech seeds threat to agrochemicals: Scientific research has come up with
Contract Manufacturing: Most of manufacturers have been moving to seeds that have self-immunity towards natural adversaries. This can be a
developing economies as labour cost is cheap in those economies. Hence, we potential threat to the business of agrochemicals. Best example of such an
believe Indian Agrochemical Company with excess manufacturing capacity introduction in the Indian market is "Bt Cotton", which resulted in a decline in
would have strong advantage in securing contract manufacturing assignment. the consumption of agrochemicals by cotton crop. However, Bt Cotton has been
Typical contract manufacturing assignments are long term in nature with fixed unable to develop immunity towards new type of pests and hence it still
margin. Hence although fixed margin limits overall profitability of company, dominates 50% of total agrochemical consumption of country.
certainty of cash flow is very high.
Diversification of manufacturing base: China has come to be known as factory
of the world and this fact remains the same for agrochemicals. However, to
diversify risks arising out of single location manufacturing base, many MNCs
have been looking at other countries. Here, the Indian agrochemical
manufacturers can position themselves as suitable alternatives to their Chinese
counterparts.
Patent expiry of molecules: Agrochemicals are protected by patents to
encourage innovation akin to the Pharmaceutical industry. Going ahead, many
molecules are likely to go off patent throwing the market open for generic
players. As per Nufarm , total likely available opportunity through patent expiry
between 2011-16 stands at US$ 5.2 bn (2010 sales value).

13
February 4, 2014
Seed the next growth frontier

Global Global Seed Industry
Total Global agrochemical sales posted CAGR of 6.1% over 2002-11, while during 14
same period, Total Seed sales post CAGR of 8.8% and subset GM seeds posted 12
CAGR of 19.6%.
11
Year\ US$ mn Crop Agrochem Non-Crop Agrochem Total Agrochem GM seeds Conventional Seed Total Seeds
8
(US$ bn)
2002 25,150 4,270 29,420 3,140 13,060 16,200 7 6
2003 26,710 4,445 31,155 3,709 13,521 17,230
2004 30,725 4,675 35,400 4,476 14,524 19,000
4 2 2 2
2005 31,190 4,905 36,095 5,095 14,657 19,752 1 1 1 1 1
2006 30,425 5,150 35,575 5,855 14,485 20,340
2007 33,390 5,365 38,755 7,068 14,648 21,716 -
Italy
Japan
India
China
USA
Brazil
Germany
Canada
Others
Argentina
France
2008 40,475 5,655 46,130 9,150 16,870 26,020
2009 37,860 5,860 43,720 10,570 17,185 27,755
2010 38,315 5,880 44,195 12,870 17,950 30,820
2011 44,015 6,290 50,305 15,685 18,810 34,495
CAGR (02-11) 6.40% 4.40% 6.10% 19.60% 4.10% 8.80%
NAFTA comprising of US, Canada and Mexico has seen drop in value of
agrochemical sales over 2005-11. Given US has been the early proponent and
adaptor of GM seed, there has been shift from usage of chemical.
US$ mn 2005 2006 2007 2011 CAGR (2005-11)
NAFTA 9,300 9,100 9,200 8,412 -1.70%
Lat-America 5,200 5,000 5,900 10,060 11.60%
Europe 9,350 9,500 11,000 12,196 4.50%
Asia 9,300 9,100 9,300 11,607 3.80%
RoW 1,750 1,800 1,850 1,740 -0.10%

14
February 4, 2014
India Crop-wise growth in distribution of seeds (%)

India Seed industry is estimated to be worth Rs 8,000-10,000 cr (US $ 2 bn) Period Cereals Pulses Oilseeds Fibres Other Total
and is 6th largest in the world. Indian seed industry is growing at 12-13% p.a. 1983-88 9.9 16.1 (0.2) (2.3) (1.8) 6.1
and the commercial seed segment accounts for a mere 25% of the total market. 1991-2002 6.8 2.6 2.2 4.7 (0.1) 5.1
Hence, the growth opportunity for commercial seeds is substantial going ahead.
2002-2011 14.5 16.4 17.4 (0.9) 15.4 14.9
As per one study wheat, groundnut, soybean and chickpea (high-volume low-
Overall CAGR 7.8 8.7 8.5 2.2 0.1 7.0
value seeds) 80% of the cropping area is sown with farm-saved seeds that are
old and obsolete varieties. Another study has concluded that more over 70% Source: Eisec Research, Industry
of seed used in India are through the farm-saved seed. In earlier days, India
seed industry was driven by PSU enterprise and has share of 60%. However From above table its clearly visible growth in seed was best during period of
over the years positive government policies has attracted investments by private 2002-11, during period industry registered CAGR of 14.9%, compared to 5.1%
players and share of Private sector share has increased from to 80% in 2010. (1991-2002) and 6.1% (1983-88). This growth was primarily driven by
India's seed industry lacked any player as such till 1960, government established innovation, increased participation from private and MNC players (driven by
National Seeds Corporation (NSC) in 1963. NSC was key participate behind strengthening of IPR norms).
successful green revolution that started in 1968. High Yield Varieties of rice, One of the biggest opportunity seed industry has is Seed Replacement Rate
wheat, jowar, maize, cotton, sunflower and few vegetables were growth driver. (SRR), SRR is the percentage of area sown out of total area of crop planted in
Till 1987, NSC remained dominate player and sector grew at CAGR of 8-10% to the season by using certified/quality seeds/cultivars other than the farm saved
be at Rs 6000 mn. Government liberalized the sector in 1988 by introducing seed. On country level SRR has improved from around 18.3% in 2001 to 25.9%
National Policy on Seed Development (NPSD). NPSD allowed import of seed , in 2008, an increase of 760bps over years. However, SRR at 25.9% indicated
entry of MNC players and Indian players established their own R&D that farmer still avoids buying new seed up to great extend
infrastructure. Number of companies operating in sector went up to 350-400
and size grew to be Rs 20 bn by 2000 and Rs 25 bn by 2002, a CAGR of 10%.
Launch of Bt Cotton is considered to be key turning point for India Agriculture
Industry. Bt cotton increased role of private company, introduced concept of
technology to Indian market. Area under cultivation for cotton increased from
7.6 million hectars (mn ha) in 2002 to 12 mn ha in 2011. Demand for Bt Cotton
Seed in value term increased from Rs 3750 mn (2002) to Rs 32,000 mn (2011),
an increase of 8.5x over 10 years.

15
February 4, 2014
All India seed replacement rate (%) of major crops Number of hybrids in major field crops developed by private and public sector
in India
Crop 2001 2002 2003 2004 2005 2006 2007 2008 Average
Wheat 13.0 13.0 13.0 16.5 17.6 21.8 25.2 26.8 18.4 2001-02 2003 to 2010 Total Share of Pvt
Crop
Paddy 19.2 19.3 19.2 16.3 21.3 22.4 25.9 30.1 21.7 Pvt PSU Pvt PSU Pvt PSU (%)
Maize 21.0 21.4 24.4 31.5 35.4 43.8 44.2 48.5 33.8 Cotton 150.0 15.0 43.0 10.0 193.0 25.0 88.5
Jowar 18.4 18.8 26.7 19.3 19.0 19.4 19.9 26.2 21.0
Maize 67.0 3.0 36.0 25.0 103.0 28.0 78.6
Bajra 45.9 48.5 51.0 44.9 55.4 55.1 48.5 62.9 51.5
Paddy 12.0 4.0 11.0 15.0 23.0 19.0 54.8
Chickpea 4.2 4.2 7.1 9.9 9.4 9.0 11.9 14.4 8.8
Urdbean 16.6 17.1 20.5 17.2 15.7 13.7 23.9 26.3 18.9 Pearl 60.0 6.0 22.0 7.0 82.0 13.0 86.3
Arhar 8.7 8.8 13.6 9.8 10.5 11.6 16.1 16.0 11.9 Sorghum 41.0 5.0 12.0 8.0 53.0 13.0 80.3
Peanut 5.2 5.5 11.0 7.1 6.9 9.8 14.3 17.0 9.6 Pigeon pea 1.0 2.0 1.0 2.0 33.3
RSM 38.4 44.6 67.0 58.5 55.4 60.7 58.6 52.7 54.5 Sunflower 35.0 6.0 13.0 10.0 48.0 16.0 75.0
Soybean 12.4 12.5 15.6 27.0 28.9 28.4 33.4 35.1 24.2
Jute 23.0 - 23.0 -
Sunflower 13.7 15.7 19.6 60.2 67.7 66.9 62.9 43.6 43.8
Mesta 11.0 - 11.0 -
Cotton 21.2 21.9 19.8 20.7 21.8 19.8 15.3 12.1 19.1
Castor 4.0 9.0 4.0 9.0 30.8
Mustard 11.0 1.0 11.0 1.0 91.7
Hence, even if SRR is increased from currently level of 25.9% to 50%, size of Safflower 2.0 - 2.0 -
domestic industry would double (US$ 5 bn). We believe private sector would Source: Eisec Research, Industry
play biggest role in increasing SRR as historic performance shows increasing
contribution of private sector.
Allowing private player entry into seed industry was one of the key turning
point of the industry. Entry of private player led to strong growth and expansion
of domestic seed industry. Private players have been to do it on back of their
ability to bring new products to market, unlike PSU that are limited by resources.

16
February 4, 2014
Rallis India Ltd ACCUMULATE

True Blue Ace
Recommendation Established in 1815, as Rallis Brothers, Rallis India came under Tata fold in 1962. The company is one of the oldest and
CMP(Rs) 160 second largest pesticide agrochemical company in the country. With agrochemical exports getting boost after setting up of
Dahej Plant in 2010, overall revenue mix between domestic (~70%) & international business (~30%) is likely to remain
Target(Rs) 189
same going ahead. Post acquisition of Metahelix, non-agrochemical revenue has seen continuous increase in contribution
Upside % 18% to overall revenue pie, from zero in FY09 to 11% in FY13. It is likely to see further increase of 300bps to 14% by FY15.
Share Holding (%) Investment Rationale

• Best place to take advantage of domestic opportunity - India's consumption of agrochemical is one of the lowest in
Promoter 50.0
the world, standing at 0.6kg per hectare. We believe that Rallis is well-placed to seize this opportunity on the back of
Public 31.4 its strong business model that revolves around - distribution network, strong brands and robust new product pipeline.
FII 12.5 • Contract Manufacturing - opportunity abundant - Total global sales of agrochemicals were estimated to be worth US
DII 6.1 $54bn in CY2012. Exports on average have been contributing 1/3rd of total revenue for the past several years. Rallis
Dahej plant will help the company grow its export business. We expect export to post CAGR of 17% over FY13-15.
Key Data • Seed - The next growth frontier - India Seed industry is estimated to be worth Rs 80 bn-100 bn and is growing at 12-
13% p.a. and the commercial seed segment accounts for a mere 25% of the total market. 80% of the cropping area is
Average Vol(6m)(000) 237.7 sown with farm-saved seeds that are old and obsolete varieties. Sighting seed to be next growth driver, Rallis acquired
FV 1 seed Research & Marketing company Metahelix. Management had guided for Rs 10 bn revenue, on accumulative
Beta 0.6 basis by the end of FY2015,CAGR of 66%, however we are building in CAGR of 37% (FY13-15) in our estimate.
Mcap (Rs Mn) 31,815 We believe at current price stock is trading at attractive valuation and hence recommend Accumulate with target price of
Rs 189 (20x FY15E EPS).
52 week H/L 185 / 110
Bloomberg /Reuters RALI IN/RALL.BO Risks to our call:
Group B / S&P BSE 500 • Seed business continues to make losses - Rallis's seed business is currently loss making, as it is under investment
Sensex / Nifty 20,209 / 6,002 phase. Although we are not building in any profit from segment, but continuation of loss would affect negatively.
• Weather: Agrochemicals are the last input in any agricultural operation and protect the final output i.e. crop. Hence,
vagaries in season could affect the demand for agrochemicals and in turn impact our estimates.
Stock Performance (%) • Difficulty in getting Exports: If the company is unable to get new customer/order and in turn unable to meet our
Abs(%) Sensex RALLIS export target, the company may post dismal performance and pose a downside risk to our estimates.
3M -3.1 3.4 Year Revenue (Rs mn) PAT (Rs mn) EPS (Rs) EBIDTA Margin (%) P/E (x) EV/EBIDTA (x) PB (x) ROE (%) ROCE (%)
1Y 3.1 25.7 FY11 10,862 1,260 6.5 17.6 24.7 16.6 6.2 13.6 10.6
FY12 12,749 835 4.3 15.9 37.3 15.7 5.6 15.8 17.6
Analyst: Sageraj Bariya FY13 14,582 1,188 6.1 14.4 26.2 14.7 5.0 20.2 17.1
Email ID: sagerajb@eisec.com FY14E 17,348 1,531 7.9 15.4 20.3 11.2 4.4 23.0 20.1
Phone No.: 022-61925337 FY15E 20,032 1,833 9.4 15.4 17.0 9.3 3.8 24.0 20.5

17
February 4, 2014
Executive Summary The next growth frontier - Seed Business - India Seed industry is estimated to
Investment Rationale be worth Rs 8,000-10,000 cr (US$ 2 bn) and is 6th largest in the world. Indian
Rallis India is one of the oldest and second largest pesticide agrochemical seed industry is growing at 12-13% p.a. and the commercial seed segment
companies in the country with a market share of around ~7% and belongs to accounts for a mere 25% of the total market. Hence, the growth opportunity
the Tata Group. Rallis derives around 75% of its Revenues from its domestic for commercial seeds is substantial going ahead. As per one study wheat,
business through sale of own branded formulations. Rallis has come a long groundnut, soybean and chickpea (high-volume low value seeds) 80% of the
way since its restructuring (FY2007-10) period, where it divested it non-core cropping area is sown with farm-saved seeds that are old and obsolete varieties.
business (Pharma & Gelatin) and generated cash (land sell-off & preferential Another study has concluded that more over 70% of seed used in India are
allotment) for investing in core agrochemical business. through the farm-saved seed. Rallis acquisition of Metahelix places company
Best place to take advantage of domestic opportunity - India's consumption in sweet spot to capitalize on seed opportunity.
of agrochemical is one of the lowest in the world, standing at 0.6kg per hectare.
This compares very poorly with other countries that have less arable land under Outlook and Valuation
coverage. For instance, Taiwan - 17kg/ha, Japan & Holland - 11kg/ha,S.Korea - We believe that Rallis is well placed to capitalize on emerging opportunities in
7kg/ha,USA-4.2kg/ha. We believe that Rallis is well-placed to seize this domestic agrochemical and seed business. Besides, EBITDA Margins have shown
opportunity on the back of its strong business model that revolves around - turnaround from lows of 14.4% in FY13 and are likely to show a minimum
distribution network (Rallis has one of the best distribution networks in the improvement of 100bp in FY14 & FY15. Going ahead, we expect Contract
country with reach of 30,000 retailers covering around 80% of India's districts), Manufacturing along with Seed to drive the company's next level of growth.
strong brands (In market research survey done 7 out of 12 brands belong to Overall, we estimate Rallis to register a CAGR of 17% and 24% in Net Sales and
Rallis) and robust new product pipeline (New product launches has been a key Profit over FY2013-15E, respectively.
strategy behind Rallis continuous strong performance). According to industry On the valuation front, at current price, the stock is trading at 17x FY2015E
estimates, the unorganized market accounts for another 50% of the industry. Earnings and 9.3x FY2015E EV/EBITDA. Historically, Rallis has traded at an
And that is where, we believe that Rallis is in a position to gain higher market average 20x one-year forward over the last 5-years. We Initiate Coverage on
share as well as charge a premium for its products. the stock with an Accumulate rating and Target Price of Rs189 (20x FY15E EPS).
Contract Manufacturing - opportunity abundant - Global agrochemical
companies have been reducing manufacturing capacity of low value products Risk to our call
to concentrate on higher-value products. Conversely, they are maintaining their Difficulty in getting Exports: If the company is unable to get new customer/
strong hold on off-patent Active Ingredients (AI) through outsourcing the same. order and in turn unable to meet our export target, the company may post
For example, Germany's BASF has cut its range of AI from 300 in 2001 to 130 in dismal performance and pose a downside risk to our estimates.
2006. Syngenta has also reduced its portfolio from 120 to 80. Bayer has reduced Seed business continues to make losses: Rallis's seed business is currently
its portfolio by 29 actives between 2000 and 2006. Key Driver for contract loss making, as it is under investment phase. Although we are not building in
manufacturing is 1) Japanese companies on account of natural calamities are any profit from segment, but continuation of loss would affect negatively.
looking at de-risking their manufacturing base. 2) US & EU agrochemicals major Weather: Agrochemicals are the last input in any agricultural operation and
have been outsourcing from china to the extent of 80-95% of their requirement protect the final output i.e. crop. Hence, vagaries in season could affect the
and are looking for geographic diversification. demand for agrochemicals and in turn impact our estimates.

18
February 4, 2014
Background Business Turnaround

Downfall Restructuring Focus on core Result
Rallis India is one of the oldest and the second largest pesticide agrochemical Draught and Sale of pharma, fertiliser focus on internal cost continuing benefit of
overcapacity in business leading to drop cutting,introduction of internal cost cutting and
company in the country with a market share of around ~7% and belongs to the industry lead to losses in sales. new products and focuson export
Sale of asset and brand building
Tata Group. The company also has a credible presence in the international 1,200 issuance of preference 15.0
share for rationalisation
market. Pesticide accounts for 89% of the company's Total Revenues, while 1,000 of debt.
10.0
plant nutrients and seeds constitute the balance. Historically contribution from 800
the Domestic business was at ~75% levels while Exports accounted for the 600
Rs cr
5.0
400
%
balance. 0.0
200
Revenue Mix 0
(5.0)
100% (200)
(400) (10.0)
22% 29% 29% 29% 29% FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009
75% Sales EBITDA %
Source: Company , Eisec Research
50%
78% 71% 71% 71% 71% R&D
25%
Rallis has a pipeline of new molecules under the various categories. Rallis and
the Council of Scientific and Industrial Research (CSIR), New Delhi jointly hold
0% commercial rights of these molecules, as this project is initiated under the Public-
FY11 FY12 FY13 FY14E FY15E Private-Partnership (PPP) scheme of New Millennium India Technology
Domestic Export Leadership Initiative. The government through soft loans (3% interest rate) funds
Source: Company , Eisec Research this research. These molecules are at various stages of field trials and molecules
have International Patent. Agrochemical R&D is very similar to that of
pharmaceutical, any molecule can turn out to be a multi-billion dollar
Business restructuring aids turnaround opportunity or prove to be a complete failure. Success of a single molecule, we
During FY2001-04, the company was involved in too many businesses which believe, will put the company into an altogether new growth trajectory. However,
diluted management's focus and was loss making. Since then, it has come a it's difficult at current juncture to factor in any possible upside or downside
long way. Rallis initiated several measures to restructure its business following from this.
which it managed to turn the corner. Some of the measures initiated by the
company included the following:
• Selling of non-core business like Pharma and Gelatin;
• Merger of subsidiaries to reduce operating expenses;
• Disposing land to generate cash; and
• Issuance of Preference share worth Rs88cr to Tata group companies.
19
February 4, 2014
Seed Business Founders Background
Rallis India acquired 77% stake in Bangalore-based seeds Research Company, Serves as Managing Director of MLS; Narayanan, a plant molecular biologist
and breeder, is a Ph.D. in plant breeding and genetics from the Tamil Nadu
Metahelix Life Sciences (MLS) for Rs 1.2 bn. valuing the company at ~1.2x K K Narayanan Agricultural University at Coimbatore, India. He later carried out post-doctoral
FY2012E revenues of Rs 1 Bn. Company funded the acquisition through internal research at the Department of Biological Sciences in Stanford University under
cash. a Rockefeller Foundation Fellowship.
With Rallis focusing on increasing its share of farmers' agri-spend, there exists Leads the business development, operations and investment at MLS. Served as
chief executive officer (CEO) of Material Sciences Corp. (MSC) in 1997 and as its
huge opportunity in the seed industry with the acquisition of MLS. The seed
president in 1991. Nadig also served as senior scientist in the bioinformatics
industry is growing at a healthy 12-13% p.a. Notably, MLS enjoys the foremost division at the Monsanto Research Center, Bangalore and later was a
advantage of being the first Indian company to have proprietary Bt trait, which Gautham Nadig
consultant to Monsanto's Plant Biotech Group for the nutrition programme at
is basically a proprietary new variant of Bt Cotton (pending govt clearance Saint Louis. Nadig was also chairman of the board of MSC in 1998.Nadig
graduated with an M.Sc in nuclear physics from the Bangalore University and
since Dec-2010). MLS also offers technology, strong brand and goodwill of did his Ph.D. in molecular biophysics from the Indian Institute of Science,
existing products coupled with a robust product pipeline and presence in the Bangalore followed by a brief post-doctoral stint at the Department of
international markets. Chemistry, Pennsylvania State University, USA.
Served as VP of the science and technology department and chief

biotechnology officer at DuPont. Earlier, he was the chief technology officer of
About Metahelix DuPont’s agriculture and nutrition platform. Kishore previously served as the
MLS has been developing high-performance hybrid seeds in rice, maize, cotton co-president of the nutrition and consumer segment and assistant chief
scientist and chief biotechnologist at Monsanto Company, which he joined in
millets and vegetables for the Indian markets with transgenic traits for insect, Ganesh Kishore
1980. He is the inventor of more than 65 issued patents. Kishore received post-
viral and fungal protection. It also provides plant transformation, regulatory doctoral training in chemistry and biology and also served as a Robert A. Welch
sciences and molecular marker services. MLS has also taken its key products Fellow at The University of Texas at Austin. Kishore is a Ph.D. in biochemistry
from the Indian Institute of Science. He has a master's and bachelor's degree in
under rice and maize to international markets like Vietnam, Thailand, Indonesia
biochemistry, physics and chemistry from the University of Mysore, India.
and Philippines. Its subsidiary, Dhaanya Seeds, has been involved in
commercialising the hybrid seeds and traits. Prior to joining MLS, Ravi was with the business development group in E.I.
DuPont India Private Limited, Gurgaon and earlier led the seed business at PHI
MLS was founded by five scientists in 2000, which has increased to become a Seeds Limited, Hyderabad. He also worked with Advanta India (previously ITC
team of 50 scientists comprising 20 Phd's and 30 agronomics and plant genomic Ravi Krishna S
Zeneca Ltd) in different positions before leading the marketing and business
specialists. MLS has research facilities in Bangalore, Hyderabad and Aurangabad. development function. In previous roles, Ravi was responsible for new business
initiatives and has considerable experience in marketing and business
The company has 3,000 contract farmers, a seed processing plant and a ware development. Ravi is a post-graduate in dairy technology and a business
house at Hyderabad. Dhaanya Seeds has a field force of 120 agronomists who graduate from the Indian Institute of Management, Ahmedabad.
reach out to more than 1,000 distributors across the country.

20
February 4, 2014
Revenue Hidden value

2,000 Advinus Therapeutics - During 2005, the company transferred its Knowledge
Services Business, a Research & Development Centre at Bangalore to Advinus
Therapeutics Pvt Ltd for a consideration of Rs26cr. Advinus is India's finest
1,500
Clinical Research Organisation (CRO) involved in business of New Drug Discovery
Rs mn
(Pharma & Agriculture) and clinical trials. The company is the first of its kind in
1,000 India to offer end-to-end development services to the global Pharma, Agro
and Biotech industries. Advinus was named as India's best emerging CRO in
drug discovery services, according to a survey conducted by Proximare, a
500 management consulting firm based in New Jersey that exclusively serves
pharmaceutical and biotechnology companies with strategic issues. We believe
Advinus has one of the best management teams in place to capitalise on the
0
R&D outsourcing opportunity
FY11 FY12 FY13
Advinus - Executive Committee
Ex-President of R&D - Ranbaxy Research Lab

PAT Dr. Rashmi Barbhaiya - CEO and
Managing Director Ex-Vice President in the Pharmaceutical Research Institute,
60
Bristol-Meyers Squibb (BMS).
Dr. Kasim Mookhtiar - EVP and CSO Ex-Bristol-Meyers Squibb & Ranbaxy Lab
Dr. Gopal Muralidharan -Chief of 20 years of experience in research and managerial in North
0 Technical Operations America
Rs mn
Advinus - Scientific Advisory Board

(60) Ex-Bristol-Meyers Squibb (BMS) - worked in drug discovery
Christopher M. Cimarusti, Ph.D
and development
Professor of Pharmacology at the University of Pennsylvania.
Perry B. Molinoff, MD More than 30 years of experience in academic and industrial
(120) sectors
President of Druid Consulting LLC, consultant to the
FY11 FY12 FY13 David C. U'Prichard, Ph.D
pharmaceutical and biotechnology industries

21
February 4, 2014
The Tata group is a major shareholder in Advinus while Rallis holds 15% stake Investment Rational
in it with company management holds minority stake. Advinus is currently loss Best place to take advantage of domestic opportunity
making and under investment mode. Rallis does not plan to sell its stake as it
India's consumption of agrochemical is one of the lowest in the world, standing
considers it as a strategic investment. We have not taken any value of Advinus
at 0.6kg per hectare. This compares very poorly with other countries that have
in our valuation of Rallis however any developments on this front would have
less arable land under coverage. For instance, Taiwan - 17kg/ha, Japan & Holland
minor impact on Rallis.
- 11kg/ha,S.Korea - 7kg/ha,USA-4.2kg/ha .
Real Estate -
Global Pesticides consumption (Kg/ha)
Rallis has considerable amount of surplus real estate that it can divest if the
need arises. The company in the past had sold real estate to raise funds for its 20
17
core business. As per media reports, the company currently has excess land of
15 13
85 acres in Hyderabad and 22 acres in Thane, Maharashtra. We have 12
conservatively estimated value of the same in the region of Rs 4.6 bn translating 10
7 7
into Rs 24 per share. Our valuations take in 30% premium to Rallis last sell 5 5
transaction of 31 acre property at Hyderabad for Rs 900 mn to Peninsula in 5
FY2008. We have not factored any value of Real Estate in our valuation 0.6
0
India accounts for 16% of the world's total food grain production and uses
only around 2% of agrochemicals. We believe this again highlights the under
usage of agrochemicals by Indian farmers and unexploited opportunity at bay
for the agrochemical companies.
We believe that Rallis is well-placed to seize this opportunity on the back of its
strong business model that revolves around - distribution network, strong
brands and robust new product pipeline. According to industry estimates, the
unorganized market accounts for another 50% of the industry. And that is
where, we believe that Rallis is in a position to gain higher market share as well
as charge a premium for its products.

22
February 4, 2014
1) Distribution network - Rallis has one of the best distribution networks in 2) Strong Product & Brand portfolio - We believe Rallis has one of the best
the country with reach of 30,000 retailers covering around 80% of India's brand portfolios in the industry. In market research survey done 7 out of 12
districts. Rallis derives around 61% of its Revenues from its domestic brands belong to Rallis. This clearly shows brand power and product
agrochemical business through sale of own branded formulations and supply effectiveness of Rallis.
of bulk to other branded sellers. We believe that Rallis distribution network
is its key strength and the differentiating feature vis-a-vis competition. Hence,
many MNC global players have inked strategic alliances with Rallis for
Rallis Brand Strengths in Indian Crop Protection Market Awareness of
distribution of their products (pesticides and seeds) in the domestic market.
brands - 2009
Strategic alliance
Indofil M-45 (indofil)
Company Product Tatamono (Rallis)
Dupont Indoxacarb Applaud (Rallis)
Acetamiprid Proclaim (Syngenta)
Syngenta Pretilachlor Antracol (Bayer)
Thiomethozam Fame (Bayer)
Paraquat di Chloride Contaf Plus (Rallis)
Tatamida (Rallis)
Emmamaectine
Asataf (Rallis)
Clodinofop
Rogor (Rallis)
Makhteshim Atrataf
Contaf (Rallis)
Captaf Confidor (Bayer)
Novaluron
0% 10% 20% 30% 40% 50% 60%
Bayer Thirodicarb
Imidaclorpid Source: Company , Eisec Research
Nihon Nohayaku Fuji 1
Buprofezin
Fenpyroximate
FMC Carbofuran
Carbosulfan
Bifenthrin
Gharda Chemicals Sulfosulfuron
Chloro + Cyper
Yara International Calcium nitrate solution
Borax International Boron 20%

23
February 4, 2014
3) Robust new product pipeline - New product launches has been a key strategy Innovation Index
behind Rallis continuous strong performance. On an average, the company
has been registering 5-6 products and launching 3-4 products every year. 40%
Pertinently, new product launches were possible due to Rallis strong reach
and goodwill among the farmers and the Tata brand associated with it which
has enabled it to conduct the field trials. The Indian registration process is 30%
regarded as one of the most stringent ones in Asia (excluding Japan). Each
new formulation typically takes 2-3 years for approval from the time of 20%
registration, as it has to undergo extensive field trials with respect to
chemistry, toxicology, metabolism, efficacy, soil residue and packaging/
labeling 10%
New product launch & registration

0%
20.0
FY10 FY11 FY12 FY13
15.0 Source: Company , Eisec Research
10.0 Rallis uses Innovation Index to measure its performance of new product
launches. Innovation index shows sales contribution from products launched
5.0 in last 4 years. Index has typically average at 25-30% of sales. In FY12 & 13,
Rallis's key brand "Applaud" and "Takumi" completed 4 years and hence came
out of Innovation index that led to fall in innovation index. We believe Rallis's
0.0
constant focus on new products would continue to yield results going ahead
FY10 FY11 FY12 FY13 on the back of its strong R&D and Registration pipeline. We believe its matter
Registration Launch of time before contribution from new launches start kicking.

24
February 4, 2014
Contract Manufacturing - Low margin, Steady cash flow - opportunity Management believes there is huge scope for contract manufacturing give the
abundant size of the opportunity. This in turn is driven by 2 major events
Global agrochemical companies have been reducing manufacturing capacity  Japanese companies on account of natural calamities are looking at
of low value products to concentrate on higher-value products. Conversely, de-risking their manufacturing base.
they are maintaining their strong hold on off-patent Active Ingredients (AI)  US & EU agrochemicals major have been outsourcing from china to
through outsourcing the same. For example, Germany's BASF has cut its range the extent of 80-95% of their requirement and are looking for
of AI from 300 in 2001 to 130 in 2006. Syngenta has also reduced its portfolio geographic diversification.
from 120 to 80. Bayer CropScience reduced its portfolio by 29 actives between
2000 and 2006.
Agrochemicals being crop specific have varying demand based on the specific
Total global sales of agrochemicals were estimated to be worth US $54bn in type of pest that hampers growth of the crop. Hence, one crop might need
CY2012. Sales of patented product constituted approximately 1/4th of the total different type of insecticides or fungicide or herbicide in different regions. In
and another 1/4th is proprietary off patent (Patent of molecule has expired but addition, there are many crops that are grown in very specific regions and may
no credible generic brand has been able to garner significant market share require less amount of agrochemicals which may not be economical to produce
from patented brand). Opportunity of even 10% of the total market size would and profitable to sell to the big global players. Therefore, the smaller regional
translate into US$ 3 bn players very often dominate these niche segments. Rallis plans to meet the
Hence, Rallis plans to selectively target this opportunity by supplying AI to the requirements of such niche demand.
industry top players. Rallis has a credible presence in the international market
through exports. Exports on average have contributed 1/3rd of total revenue Rallis has is set up a new plant at Dahej (Phase-1) for manufacturing AI for the
over long term. Over FY2011-13, Rallis Exports registered a CAGR of 27.3%. To export market as well as to meet its own formulation consumption. Total capex
attract client and for focus on export, Rallis set up a new plant at Dahej for of the Dahej plant is estimated at Rs150-200cr. Management has hinted about
manufacturing for the export market. the Dahej Phase-2 and to attract new customer has recently started new
chemistry reaction plant (pilot plant) at its existing Dahej plant.
Revenue - Domestic & Export
6,000 60
4,500 45
(Rs mn)
(%)
3,000 30
1,500 15
0 0
FY12 FY13 FY14E FY15E
Export % YoY
Source: Company, EISEC Research

25
February 4, 2014
The next growth frontier - Seed Business All India seed replacement rate (%) of major crops
India Seed industry is estimated to be worth Rs 8,000-10,000 cr (US $ 2 bn) and
Crop 2001 2002 2003 2004 2005 2006 2007 2008 Average
is 6th largest in the world. Indian seed industry is growing at 12-13% p.a. and
Wheat 13.0 13.0 13.0 16.5 17.6 21.8 25.2 26.8 18.4
the commercial seed segment accounts for a mere 25% of the total market. Paddy 19.2 19.3 19.2 16.3 21.3 22.4 25.9 30.1 21.7
Hence, the growth opportunity for commercial seeds is substantial going ahead. Maize 21.0 21.4 24.4 31.5 35.4 43.8 44.2 48.5 33.8
As per one study wheat, groundnut, soybean and chickpea (high-volume low Jowar 18.4 18.8 26.7 19.3 19.0 19.4 19.9 26.2 21.0
value seeds) 80% of the cropping area is sown with farm-saved seeds that are Bajra 45.9 48.5 51.0 44.9 55.4 55.1 48.5 62.9 51.5
Chickpea 4.2 4.2 7.1 9.9 9.4 9.0 11.9 14.4 8.8
old and obsolete varieties. Another study has concluded that more over 70%
Urdbean 16.6 17.1 20.5 17.2 15.7 13.7 23.9 26.3 18.9
of seed used in India are through the farm-saved seed. In earlier days, India
Arhar 8.7 8.8 13.6 9.8 10.5 11.6 16.1 16.0 11.9
seed industry was driven by PSU enterprise and has share of 60%. However Peanut 5.2 5.5 11.0 7.1 6.9 9.8 14.3 17.0 9.6
over the years positive government policies has attracted investments by private RSM 38.4 44.6 67.0 58.5 55.4 60.7 58.6 52.7 54.5
players and share of Private sector share has increased from to 80% in 2010. Soybean 12.4 12.5 15.6 27.0 28.9 28.4 33.4 35.1 24.2
Sunflower 13.7 15.7 19.6 60.2 67.7 66.9 62.9 43.6 43.8
Cotton 21.2 21.9 19.8 20.7 21.8 19.8 15.3 12.1 19.1
Crop-wise growth in distribution of seeds (%) Source: Eisec Research, Industry
Period Cereals Pulses Oilseeds Fibres Other Total
1983-88 9.9 16.1 (0.2) (2.3) (1.8) 6.1

Sighting seed to be next growth driver, Rallis acquired seed Research &
Marketing company Metahelix along with its R&D subsidiary Dhaanya Seeds.
1991-2002 6.8 2.6 2.2 4.7 (0.1) 5.1
In case of Seed business during acquisition (FY2010), Management had guided
2002-2011 14.5 16.4 17.4 (0.9) 15.4 14.9
for Rs 10 bn revenue, on a cumulative basis by the end of FY2015. Till date
Overall CAGR 7.8 8.7 8.5 2.2 0.1 7.0
Metahelix has registered total cumulative revenue of Rs 3.8 bn (FY10-13). To
Source: Eisec Research, Industry achieve the target of Rs 10 bn, company would need to achieve CAGR of ~66%
over next 2 years. Given seed industry is expected to grow at 12-13%, we keep
moderate expectation for Rallis Seed business and estimate it to register CAGR
One of the biggest opportunity seed industry has is Seed Replacement Rate of 37% over FY2013-15. However any positive contribution on EBITDA margin
(SRR), SRR is the percentage of area sown out of total area of crop planted in would only be possible once business achieves revenue of Rs 3.5 bn plus.
the season by using certified/quality seeds/cultivars other than the farm saved
seed. On country level SRR has improved from around 18.3% in 2001 to 25.9%
in 2008, an increase of 760bps over years. However, SRR at 25.9% indicated
that farmer still avoids buying new seed up to great extend.

26
February 4, 2014
Improving financials Going ahead, we expect the company's Total Revenues to post moderate CAGR
Based on 9MFY2014 performance of Rallis, where in revenues grew by 20.7% of 17% over FY2013-15E on the back of 17% & 37% growth in Exports & Seed
and EBITDA margin marginally improved by 51bps to 16.4%, we expect domestic business, while domestic is expected to grow at modest pace of 13%.
business to post CAGR of 13% over FY2013-15. Our estimate of domestic Management is hopeful of receiving a major leg up in export business by end
business growth is same as that during FY2007-10 and 800bps higher compared of Q1FY15, as new order materialize.
to FY2010-13 (5% CAGR). Even though India has received good rainfall during
100%
the current season, there has been a case of excess rain on district level. 8% 11% 13% 15%
Monsoon withdrawal that typically starts from 1-Sept, this time got delayed to
9-Sept. This led to delay in spraying activity by farmer, similarly 3Q has witness 75% 29% 29% 29% 29%
cyclone Helen and Leher hit coastal Andhra Pradesh largest agrochemical market
of country. Due to this Industry has collectively lost sales approximately worth
50%
Rs 12-13 bn in 9mFY14.
63% 61% 58%
25% 57%
Changing revenue mix
24,000
0%
19,000 Domestic Crop Care Export Seed & Service
(Rs mn)
14,000
Based on 9MFY14 performance we are building in 100bp improvement in
EBITDA margin over FY13. We expect Rallis to t have steady EBITDA margin of
9,000
15.4% in FYT14 & FY15 respectively. We believe our EBITDA Margins are
achievable considering that Rallis has posted average margin of 16.7% over
4,000 FY09-13 (Max - 19.4%, Min - 14.4%). We estimate EBITDA to register a CAGR of
FY12 FY13 FY14E FY15E 21% over FY2013-15E compared to Sales CAGR of 17% over same period.
Domestic - Agrochemical Export - Agrochemical Seeds & Other - Domestic

27
February 4, 2014
EBITDA margin Adj PAT

20
2,000
18 1,500
(Rs mn)
15 1,000
13
500
10
FY12 FY13 FY14E FY15E -
EBITDA
3,200
Return ratios
30
2,400
(Rs mn)
24
1,600
(%)
18
800
12
-
6
RoCE RoE
We expect benefit of increasing EBITDA margin to flow down to PAT leading to
CAGR of 24% over FY13-15. Going ahead, we estimate the company to further
improve its RoE to 23% and 24% in FY2014 and FY2015 respectively from 20%
in FY13. While, RoCE is likely to improve from 19.4% in FY13 to 24% & 26% in
FY14 & FY15.
28
February 4, 2014
Outlook & Valuation Risk to our call

The agriculture sector has been the focus area of governments & industries for Difficulty in getting Exports: If the company is unable to get new customer/
long time. Food security has been top priority for the government while order and in turn unable to meet our export target, the company may post
reduction in food loss is one of the easiest ways to boost food production. dismal performance and pose a downside risk to our estimates.
While usage of agrochemicals can reduce the loss of food production, there is
a limit. Hence the need of the hour is increasing crop yield with help of using Seed business continuous to make losses - Rallis's Seed Business is currently
better quality seed. Country has already seen one green revolution and is in loss making, as it is under investment phase. Although we are not building in
dire need of another. any profit from segment, we estimate losses to be minimal, any variance from
We believe that Rallis is well placed to capitalise on emerging opportunities in the same could negatively affect our estimate earning.
domestic agrochemical and seed business. Besides, EBITDA Margins have shown Weather: Agrochemicals are the last input in any agricultural operation and
turnaround from lows of 14.4% in FY13 and are likely to show a minimum protect the final output i.e. crop. Hence, vagaries in season could affect the
improvement of 100bp in FY14 & FY15. Going ahead, we expect Contract demand for agrochemicals and in turn impact our estimates.
Manufacturing along with Seed to drive the company's next level of growth.
Overall, we estimate Rallis to register a CAGR of 17% and 24% in Net Sales and
P/E Chart
Profit over FY2013-15E, respectively.
On the valuation front, at current price (Rs159), the stock is trading at 17x 40
FY2015E Earnings and 9.3x FY2015E EV/EBITDA. Historically, Rallis has traded
at an average 20x one-year forward EPS over the last 5-years. We Initiate 30
Coverage on the stock with an Accumulate rating and Target Price of Rs189
(20x FY15E EPS). 20
P/E Chart
250
10
200
0
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
150
100 P/E 5-year avg 3-year avg
50
-
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Jul-08
Oct-08
Jan-09
Jul-09
Oct-09
Jan-10
Jul-10
Oct-10
Jan-11
Jul-11
Oct-11
Jan-12
Jul-12
Oct-12
Jan-13
Jul-13
Oct-13
Jan-14
Price 10.0x 14.0x 18.0x 22.0x 26.0x

29
February 4, 2014
Financial Summary
P&L Statement (Y/E Mar) FY11 FY12 FY13 FY14E FY15E Balance Sheet (Y/E Mar) FY11 FY12 FY13 FY14E FY15E
Net Sales 10,862 12,749 14,582 17,348 20,032
Equity Share Capital 194 194 194 194 194
% chg 20.6 17.4 14.4 19.0 15.5
Total Expenditure 8,948 10,719 12,476 14,676 16,947 Preference capital 0 0 0 0 0
EBIDTA 1,915 2,030 2,106 2,672 3,085 Reserves & Surplus 4,855 5,336 6,013 6,907 7,944
(% of Net Sales) 17.6 15.9 14.4 15.4 15.4
Shareholders fund 5,049 5,530 6,207 7,102 8,138
Dep & Amort 171 287 315 383 448
EBIT 1,744 1,743 1,790 2,289 2,637 Long term debt 844 856 107 90 90
Interest 37 146 185 137 99 Others 239 478 698 698 698
Other Income 138 69 117 84 138
Current Liabilities & Prov 4,035 4,350 4,889 5,233 6,106
Exceptional item - (172) - - -
PBT 1,845 1,494 1,723 2,236 2,675 Total Liabilities 10,167 11,214 11,902 13,122 15,032
(% of Net Sales) 17.0 13.1 11.8 12.9 13.4 Net Fixed Assets 5,071 5,769 5,899 6,453 7,102
Tax 581 487 535 704 843
(% of PBT) 31.5 29.2 31.0 31.5 31.5 Investment 1,273 1,109 1,105 1,105 1,105
PAT before MI 1,264 1,007 1,188 1,531 1,833 Cash & equivalents 146 112 258 1,248 2,482
MI & Share of Asso (3.9) 0.0 0.0 0.0 0.0 Total Current Assets 3,823 4,336 4,898 5,564 6,825
Adj PAT 1,260 835 1,188 1,531 1,833
% chg 39.1 (33.7) 42.3 28.9 19.7 Total Assets 10,167 11,214 11,902 13,122 15,032
Key Ratios FY11 FY12 FY13 FY14E FY15E

Cash Flow (Y/E Mar) FY11 FY12 FY13 FY14E FY15E
Profit before tax 1845 1494 1723 2236 2675 EBITDA margin (%) 17.6 15.9 14.4 15.4 15.4
(-) Tax (706) (407) (360) (704) (843) Net Profit Margin 11.6 7.9 8.1 8.8 9.1
(+) Depreciation 171 287 315 383 448
RoE 13.6 15.8 20.2 23.0 24.0
(-)Change in Working Cap (314) (507) (321) 326 687
ROCE 10.6 17.6 17.1 20.1 20.5
(+)Others (113) 80 86 137 99
OCF 883 946 1443 2377 3066 Inventory (days) 76.9 77.8 66.9 70.0 71.0
(-) Capex (1278) (466) (349) (937) (1096) Payable (days) 120.7 91.7 78.8 79.0 80.0
(-) investment (60) (275) (50) 0 0 Receivables (days) 39.1 32.0 44.0 42.0 40.0
(-) others)
Debt to Equity 0.2 0.2 0.0 0.0 0.0
CFI (1338) (741) (399) (937) (1096)
(+) Net debt 849 369 (227) (17) 0
Valuation parameter
(+) Net Equity 0 0 0 0 0
(-) Dividend Payout (353) (473) (495) (296) (637) EPS 6.5 4.3 6.1 7.9 9.4
(+)Others (38) (138) (172) (137) (99) P/E 24.7 37.3 26.2 20.3 17.0
CFF 458 (242) (895) (450) (736)
P/S 2.9 2.4 2.1 1.8 1.6
Inc./(Dec.) in Cash 2 (38) 149 990 1234
P/BV 6.2 5.6 5.0 4.4 3.8
Opng Cash balances 119 146 112 258 1248
C/s Cash balances 121 108 261 1248 2482 EV / EBITDA 16.6 15.7 14.7 11.2 9.3

30
February 4, 2014
UPL Ltd REDUCE

M&A strategy not paying off well
Recommendation UPL is a leading global generic player in the agrochemical Industry. UPL ranks among the Top-5 post patent agrochemical
CMP(Rs) 185
manufacturers in the world and has a manufacturing facilities spread across the world in India, France, Spain, UK, Vietnam,
Argentina, Netherlands, Italy and China.
Target(Rs) 195 However, we believe generics are expected to face tough time from here on account of 1) stagnation of growth in developed
Upside % 5% market (US & EU), 2) as more countries switch to GM & Hybrid seeds 3) increasing competition amongst generics as market
growth tapers down. Hence we recommend Reduce on the stock with target price of Rs195 (9x FY15E EPS). However
Share Holding (%)
ongoing buyback may continue to support stock price around current levels.
Promoter 28.9 Investment Concerns
Public 17.1 • Generic Market becoming generic, seed is future - Share of generic has been increasing continuously over last decade.
FII 44.9 Share of generics have increased from 36% in 2004 to 40% in 2006 to 52% in 2011. There has been visible drop in rate
DII 9.1
of introduction of new agrochemical / crop protection molecule over past 2 decade. We believe this is conscious
strategy being followed by Innovator firms, as they have started focusing on Seed. This is visible in changing business
model, wherein R&D spends on Seed has grown at higher rate compared to Agrochemical. Total Global agrochemical
Key Data
sales posted CAGR of 6.1% over 2002-11, while during same period, total Seed sales post CAGR of 8.8% and subset
Average Vol(6m)(000) 2338.4 GM seeds posted CAGR of 19.6%. In nutshell global agrochemical business is becoming low to no growth with too
FV 2 many players fighting for market share.
Beta 0.8 • M&A strategy not paying off - UPL's strong revenue growth was possible on back of aggressive M&A strategy. Recent
M&A amongst top-4 players globally, indicates lack of growth as reason behind consolidation in global agrochemical
Mcap (Rs Mn) 81,071 industry. Although, acquisitions have bolstered size of UPL, margins have taken hit. Over the years EBITDA margins
52 week H/L 218 / 113 have come down from highs of 28% in FY06 and stabilized in region of ~18% over FY10-13. While RoE/RoCE has
Bloomberg /Reuters UPLL IN/UNPO.BO averaged at 12/15%, during mentioned period.
Group A / S&P BSE 100
Risks to our call:
Sensex / Nifty 20,209 / 6,002 • Consolidated in Industry - there is has been consolidation in global agrochemical industry, if pace increases and in
turn reducing competition, pricing power could return to generics and boosting overall profitability of UPL.
Stock Performance (%) • Farmer switch back to agrochemical - Global agrochemical growth has been affected as farmers have shifted to
Abs(%) Sensex UPL better seed that reduces consumption of agrochemical, any switch back to agrochemical would be positive for UPL.
3M -3.1 15.2 Year Revenue (Rs mn) PAT (Rs mn) EPS (Rs) EBIDTA Margin (%) P/E (x) EV/EBIDTA (x) PB (x) ROE (%) ROCE (%)
1Y 3.1 42.7 FY11 57,607 4,774 10.3 18.6 17.9 7.0 2.3 14.2 12.4
FY12 76,713 5,365 11.6 18.0 15.9 7.2 2.0 13.6 11.7
FY13 91,945 7,719 17.4 18.1 10.6 5.5 1.8 17.5 11.5
Analyst: Sageraj Bariya
Phone No.: 022-61925337 FY15E 116,424 9,971 22.9 18.2 8.1 4.2 1.4 18.4 12.5

31
February 4, 2014
Executive Summary
Investment Concerns Outlook and Valuation
UPL is a leading global generic player in the Agrochemical Industry. UPL ranks The Agriculture Sector, has been grabbing lot of attention in recent times. As
among the Top-5 post patent agrochemical manufacturers in the world and per UN report, global demand for major grains like wheat, rice and soya is
has a manufacturing facilities spread across the world in India, France, Spain, estimated to grow at CAGR of 1.4% over 2012-27 driven by demand from Food,
UK, Vietnam, Argentina, Netherlands, Italy and China. Total global agrochemical Feed and Fuel. Total food requirement is likely to increase by 30% in 2030 and
market is worth US $50bn, of which a mere US$ 26 bn is currently being catered by 50% in 2050.
to by the generic players. Furthermore, 49% of the same is controlled by the However, we believe generics are expected to face tough time from here on
six largest generic players including UPL. back of 1) stagnation in growth in developed market (US & EU), 2) countries
Generic Market becoming generic - Share of generic has been increasing switching to GM & Hybrid seeds 3) increasing competition amongst generics
continuously over last decade. Share of generics have increased from 36% in as market growth tapers down. UPL has been growing on back of M&A, from
2004 to 40% in 2006 to 52% in 2011, total global agrochemical sales posted here on key growth drivers are likely to be emerging markets like India, Brazil
CAGR of 6.1% over 2002-11. There has been visible drop in rate of introduction and other Latin American countries.
of new agrochemical / crop protection molecule over past 2 decade, that generic On the valuation front, Over the 3-year period of FY2008-13, UPL traded at an
companies target post patent-expiry. In nutshell global agrochemical business average one-year forward PE of 9x. We expect UPL sales to register CAGR of
is becoming low to no growth with too many players fighting for market share 12.5% over FY2013-15, with marginally improvement in EBITDA margins, Adj
Changing Business Model - Given low consumption rate in developing countries, PAT is likely to show a CAGR of 13.7% over mentioned period. With RoCE and
it offers strong growth opportunities. Given 3/4th of market is growing at RoE at 12.5% and 18.4% in FY15E, at current levels of FY15E earnings, the
reasonable pace, Agrochemical companies ought to spend more on stock is trading at fair valuation. We believe there is limited upside to the stock
agrochemical R&D. However that doesn't seem to be the case, as visible from from here on and hence recommend Reduce on the stock with target price of
declining rate of introduction of new molecule. Focus shifting from Chemical Rs195 (9x FY15E EPS). However ongoing buyback may continue to support
to Seed - Increasing market share of generic and slowing rate of new molecule stock price around current levels.
companies. This is visible in changing business model, wherein R&D spend on Risk
Seed has grown at higher rate compared to Agrochemical. Total Global
Consolidated in Industry - there is has been consolidation in global
agrochemical sales posted CAGR of 6.1% over 2002-11, while during same
agrochemical industry, if pace increases and in turn reducing competition,
period, Total Seed sales post CAGR of 8.8% and subset GM seeds posted CAGR
pricing power could return to generics and boosting overall profitability of
of 19.6%.
UPL.
M&A strategy not paying off - UPL's strong revenue growth was possible on
Farmer switch back to agrochemical - Global agrochemical growth has been
back of aggressive M&A strategy. Recent M&A amongst top-4 players globally,
affected as farmers have shifted to better seed that reduces consumption of
indicates lack of growth as reason behind consolidation in global agrochemical
agrochemical, any switch back to agrochemical would be positive for UPL.
industry. Although, acquisitions have bolstered size of UPL, margins have taken
hit. Over the years EBITDA margins have come down from highs of 28% in FY06
and stabilized in region of ~18% over FY10-13. While RoE/RoCE has averaged
at 12/15%, during mentioned period.
32
February 4, 2014
A Global Generic Play UPL operates in major markets like USA, EU, Latina America and India, which
UPL is a leading global generic player in the Agrochemical Industry. UPL ranks helps in diversifying its revenue stream along with mitigating the risks arising
among the Top-5 post patent agrochemical manufacturers in the world and from operating in a single country or region. Over the years revenue mix has
has a manufacturing facilities spread across the world in India, France, Spain, changed, from US & EU dominating with 56% of revenue in FY2009 to 39% in
UK, Vietnam, Argentina, Netherlands, Italy and China. FY2013. With revenue contribution of 27%, the company has carved Latin-
Total off-patent market is worth US $54bn, of which a mere US$ 18 bn is American Market as separate geography, mainly comprising of Brazil, Argentina,
currently being catered to by the generic players. Furthermore, 56% of the Colombia, etc.
same is controlled by the six largest generic players including UPL.
Revenue Breakup
100%
Total market - US$
54bn 24 27 26 27
32
75%
Sales of Total 6 Cos- 15 14
US$ 36bn 32
12,000 29 21
(%)
50% 18 18
Sales of generic Top-4 Cos -
9,000 US$ 10bn
21 22 25
(US$ mn)
22 19
25%
6,000
24 22 22 19 20
3,000
0%
-
FY09 FY10 FY11 FY12 FY13
Sumitomo
Monsanto
UPL
BASF
Dow
Syngenta
MAI
Bayer
Others
DuPont
Nufarm
N.America India EU RoW Lat-AM

The global Agrichem industry, valued at US $54bn (CY2011), is dominated by

the Top-6 Innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow,
which enjoy large market share of patented (23%) and off patent market (25%).
Thus, almost 25% of the total pie worth US$ 13 bn (controlled by the Top-6
Innovators through proprietary off-patent products) provides high growth
opportunity for larger integrated generic players like UPL

33
February 4, 2014
Advanta India
UPL has expansive product portfolio which helps in further diversifying its Globally, all the agrochemical companies have ventured into the Seed business
Revenue mix. UPL's product portfolio comprises: (a) Pre-harvesting crop as a strategy to diversify and further boost revenues. The global Seeds business
protection, (b) Post harvesting crop protection and (c) Non-crop protection. is estimated to be worth US$40bn and has registered CAGR of 9% over past 10
years. Global Seed Industry is dominated by the same Top-5 innovator
• Pre-harvesting crop protection is basically adopted by the farmers to avert, companies that are also leaders in the Agrochemical space.
destroy or control pests or unwanted type of plants or animals that cause In order to offer farmers a complete package of seed and agrochemical, UPL
harm to crops or hampers the normal growth process of crops. Crop acquired 100% stake in the Netherland-based Advanta Seeds in 2006 for a
protection is done prior to crops getting harvested. UPL derives maximum consideration of Euro100mn (approx Rs560cr). Later through an IPO, UPL diluted
of its Revenue from the Farm Crop Protection Segment - further classified its stake in the company to 49.9%. Advanta is in the business of hybrid seeds
into insecticides, herbicides and fungicides, which aids further and operates in geographies like Americas (USA, Argentina), Australia and Asia
diversification of Revenues.
(India, Thailand).
• Post harvesting crop protection, as the name suggests, is done post the
Advanta's key offering pertains to crops like rice, cotton, sunflower, sorghum,
crops are harvested and stored. Pertinently, crops can be completely
corn, canola and vegetables. For CY2012, the company posted Revenues of Rs
destroyed during transportation or storage by pests. But, adoption of
crop protection methods (usage of agrochemicals) post harvesting 10 bn and Net Profit of Rs 594 mn, with RoE & RoCE of 10.7% & 8.9% respectively.
minimises crop loss and increases food availability.
• Non-Crop Protection Segment entails protecting turfs and ornamental (Rs mn) Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Sales 6,405 6,984 7,092 9,486 10,679
lawns, nurseries at home and office, and domestic and industrial pest
EBITDA 769 413 210 1,317 1,678
management. These segments contribute the least to the company's Total
EBITDA (%) 12.0 5.9 3.0 13.9 15.7
Revenues.
PAT 488 252 (297) 123 594
RoE (%) 10.3 4.8 (6.3) 2.4 10.7
RoCE (%) 5.1 1.6 (0.2) 7.2 8.9

34
February 4, 2014
Generic Market becoming generic

Share of generic has been increasing continuously over last decade. Share of Slowing rate of new molecule introduction
generics have increased from 36% in 2004 to 40% in 2006 to 52% in 2011. This There has been visible drop in rate of introduction of new agrochemical / crop
begs question whether generic companies are gaining upper hand and protection molecule over past two decade. Given low consumption rate in
managing to increase their market share or Top-6 Innovators players are exiting developing countries, it offers strong growth opportunities. Given ~50% of
the agrochemical business. market is growing at reasonable pace, Agrochemical companies ought to spend
more on agrochemical R&D. However that doesn't seem to be the case, as
Declining Marketshare of Innovators visible from declining rate of introduction of new molecule.
100%
36% 40%
New Active Ingredient Introductions
75% 52%
24
50% 33% 32%

18
25%
25%
31% 28% 12
23%
0%
2004 2006 2011 6
Proprietary Proprietary off patent Generic
0
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011

35
February 4, 2014
Changing Business Model - Focus shifting from Chemical to Seed

Agrochemical Active Ingredients in Development Increasing market share of generic and slowing rate of new molecule
80
companies. This is visible in changing business model, wherein R&D spend on
Seed has grown at higher rate compared to Agrochemical.
60
R&D Expenditure – Historical development
600
40 2001
450
US $mn
20
300
150
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0
Source: Eisec Research, Industry Monsanto DuPont Syngenta BASF Dow Bayer
Agrochemicals Seed and Traits

Lowering rate of introduction of new molecules directly impacts future growth
potential of generic companies like UPL. Generic companies essentially play 1600
on cost competitive advantage once molecule is off patent. If there are fewer 2011
molecules likely to go off patent, future growth becomes question market for 1200
generic companies. In nutshell global agrochemical business is becoming low
US $mn
to no growth with too many players fighting for market share. 800
400
0
Agrochemicals Seed and Traits

36
February 4, 2014
On aggregate basis, total industry R&D spends on Seed has surpassed that of Is cost of inventing seed lower than agrochemicals?
agrochemicals. If one were to believe there has been change in business models of Top-6
R&D Expenditure of Leading Agrochemical Companies innovator players from agrochemical to seed, one needs to understand
3600
economics of inventing better seed. Studies show cost of inventing new plant
traits/seed are lower than agrochemical.
2700
(US $mn)
280 256
1800
210
900
(US$ mn)
136
0 140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Agrochemical R&D Seed and Trait R&D
70
There has been marked increase in cost of innovation and bringing new molecule 0
to market over period. A single new molecule costed US$ 152 mn in 1995 that Agrochemical Plant trait
grew by 21% to US$ 184 mn in 2000 and 39% from there to US$ 256 mn in Source: Eisec Research, Industry
2008 (CAGR - 4.1% from 1995)
As per industry, cost of inventing new plant trait/seed is in region of US$ 136mn,
280 256
while that for agrochemical is US$ 256 mn. However, if one were to look at
average time needed for new product introduction, it stands at 10 years for
210 184 agrochemical and 13 years for seed. This raises another question, if old adage
152 of "Time is Money" holds true, then why would company invest in seed
(US$ mn)
140 compared to agrochemical.
70
0
1995 2000 2008

37
February 4, 2014
Time from New Product Inception to First Introduction M&A key strategy to drive growth or norm in industry?
16 UPL has been one of the fastest growing global agrochemical company in the
sector. Over FY2008-13, UPL revenue registered a CAGR of 20%. This was on
12 back of aggressive M&A strategy followed by the company. Acquisition of
product/brand/molecule/company has been key corner stone of UPL's growth
8 strategy, over past 2 decade UPL has acquired 26 companies or product across
Year
the world.
4
Acquisition history
Company / Product/Brand/Molecule Country Year
0 MTM Agrochemicals Ltd UK 1994
1995 2000 2005 -08 2011 Agrodan A/S Denmark 1996
Agrochemical Seed Devrinol USA 1996
Devrinol RoW RoW (Ecl Japan & USA) 1997
Devrinol Japan Japan 2000
Given agrochemicals are last component that goes into farmer's investment Surflan USA 2004
chain, it faces lot of uncertainty. Farmer would buy agrochemical, only once he Ultra Brazer Worldwide 2004
is sure that crop would grow. Another advantage seed offers is considerable Lenacil, Cloradizon Europe 2004
pricing power to company. Performance of saved seed is substantially lower Ag Value Inc. USA 2005
compared to original. Farmers have to buy new seed for every season from Cequisa Europe 2006
SWAL Corporation India 2006
company, in turn giving pricing power to company.
Reposo S.A. Argentina 2006
Investment chain of farmer Advanta B.V. Netherlands 2006
Corpserve (Pty) Limited South Africa 2006
Agrochemicals
Asulam, Trichlorfon & ODM Worldwide with exception 2006
Bensulfuron-methyl Worldwide (excl Asia Pacific) 2006
Fertiliser Propanil Worldwide 2006
Cerexagri Worldwide 2007
Supertin, Vendex Worldwide 2007
Labour Icona Argentina 2007
Evofarm Colombia 2008
RiceCo USA 2010
Seed Mancozeb Product from DuPont Global 2010
DVA Agro Do Brasil (51%) Brazil 2011
Sipcam Isagro Brazil (50%) Brazil 2011
Land
SD Agchem Netherlands 2012
Source - Company, Media reports, Eisec research

38
February 4, 2014
UPL's two-fold acquisition strategy has been primarily responsible for such 24
stupendous growth. The company's strategy entails:
• Acquiring original brands from the Innovators - Innovators have been 18
selling out old brands to focus on new brands (molecules) or seed.
• Acquiring small/ regional players - Acquires small players dominant in a
(%)
12
region/single product/small product portfolios but lacking scale and
capability to become a global player.
6
 UPL also targets a 3-4 year payback period at the time of the
acquisition.
-
Although, acquisitions have bolstered size of UPL, margins have taken hit. Over
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
the years EBITDA margins have come down from highs of 28% in FY06 and
stabilized in region of ~18% over FY10-13. While RoIC has averaged at 15.5%, RoE RoCE
during mentioned period. Source: Company, EISEC Research
32 We believe margin decrease have been on account of following reasons,

1) Most of acquisitions have been in developed market, where labour cost
is high and further cost reduction is challenging.
24
2) MNCs sold off outdated molecule once farmers had switched to better
offering.
(%)
16
3) Farmers shifting to better option - seeds (that require less or nil usage of
pesticides).
8 4) Generic market as such witness high competition in turn leading to price
reduction.
-
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Recent global events indicates lack of growth as reason behind consolidation

EBITDA margin Towards end of 2009 and early 2010, Global rank #1 Japanese agrochemical
Source: Company, EISEC Research major Sumitomo acquired stake in Australia based Nufarm (Global rank #3). In
October 2011, ChemChina acquired Israel based Makhteshim Agan Industries
Ltd (Global rank #2). We believe this M&A has been driven more by lack of
growth opportunity. Ancillary benefit of M&A is consolidation of manufacturing
facility, helping company achieving better cost and overall consolidation of
market share leads to better pricing power.
39
February 4, 2014
Financials Though over the year EBITDA margins have dropped, however over FY10-13 it
During 9MFY14 Company posted growth of 16.8%, of which 6% was on account has stabilized in region of ~18%. For 1HFY14, EBITDA margin came in at 18.4%.
of exchange, while of the balance 10% was volume and 1% was price hike. Management has guided for 100bps expansion, we believe company would be
Given India has witness strong rainfall, growth in India business has been strong able to maintain margin at current level for FY14 & 15.
at 25%. North American market that witness delayed winter in posted 7%
growth. Latin American market witness regular sowing and sales registered a
growth of 19%. Profitability to remain concern - Management plans to continue its investment
in registration of molecules along with debottlenecking of capacity. Total capex
Management has guided for 12-15% growth in FY2014E excluding acquisitions
is likely to be Rs 4-4.5bn for each year in FY14 & FY15, with 1/3rd being spent
at the end of 1HFY14, however same has been revised downward in Q3FY14 to
on registration, while balance being regular plant capacity & maintenance
10-12%. We estimate Sales to record CAGR of 12.5% over FY2013-15E (excluding
expansion. Given nature of business, working capital requirements are likely
acquisitions), as FY14 grows by 15% on account of currency impact. North
to remain high. This is likely to restrict overall profitability of the company.
American market has seen switch over to GM seed, hence growth is likely to
RoCE/RoE is likely to persist in range ~12%/~ 18%
be in range of 2-4% over long term. Similarly, though EU market has not switched
to GM seed, growth in sector has been muted over past few years as it has
reached saturation level. EU agrochemical industry has registered CAGR of 4.2% Profitability
over 2005-12.Going forward India & Lat-Am market (driven by Brazil) are likely 20
to witness high growth. Brazil currently forms ~3-5% of UPL's total revenue
base, while India contributes 19%.
15
Revenue Breakup
36,000 10
27,000 5
(Rs mn)
18,000
-
9,000 RoE RoCE
-
N.America India EU RoW Lat-AM

40
February 4, 2014
Outlook & Valuation P/E Chart

The Agriculture Sector, has been grabbing lot of attention. As per UN report, 28
global demand for major grains like wheat, rice and soya is estimated to grow
at CAGR of 1.4% over 2012-27 driven by demand from Food, Feed and Fuel. 21
Total food requirement is likely to increase by 30% in 2030 and by 50% in 2050.
Food security is also top priority for most governments, while reducing food 14
loss is one of the easiest ways to boost food inventory. As per Rallis India report
estimate of 2012, value of crop losses caused due to non-usage of pesticides
7
was around Rs 100,000cr, accounting for approximately 1% of India's GDP
(FY2012). Pertinently, usage of Pesticides or Agrochemicals can reduce the loss
of food production. Hence, we believe that the Agrochemical companies would -
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
continue to do well in wake of heightened food security risks and strong demand
is likely to be witnessed across the world. Overall, we expect the global
Agrochemical industry to perform well from here on.
1yr fwd P/E 3yr Avg 5yr Avg
However, we believe generics are expected to face tough time from here on
back of 1) stagnation in growth in developed market (US & EU), 2) as more
countries switch to GM & Hybrid seeds 3) increasing competition amongst Risk to our call
generics as market growth tapers down. UPL has been growing on back of
Consolidated in Industry - there is has been consolidation in global
M&A, from here on key growth drivers are likely to be emerging markets like
agrochemical industry, if pace increases and in turn reducing competition,
India, Brazil and other Latin American countries.
pricing power could return to generics and boosting overall profitability of
On the valuation front, Over the 3-year period of FY2008-13, UPL traded at an UPL.
average one-year forward PE of 9x. We expect UPL sales to register CAGR of
Farmer switch back to agrochemical - Global agrochemical growth has been
12.5% over FY2013-15, with marginally improvement in EBITDA margins, Adj
affected as farmers have shifted to better seed that reduces consumption of
PAT is likely to show a CAGR of 13.7% over mentioned period. With RoCE and
agrochemical, any switch back to agrochemical would be positive for UPL.
RoE at 12.5% and 18.4% in FY15E, at current levels of FY15E earnings, the stock
is trading at fair valuation. We believe there is limited upside to the stock from
here on and hence recommend Reduce on the stock with target price of Rs195
(9x FY15E EPS). However ongoing buyback may continue to support stock price
around current levels.

41
February 4, 2014
Financial Summary
Net Sales 57,607 76,713 91,945 105,112 116,424 SOURCES OF FUNDS
% chg 6.5 33.2 19.9 15.2 9.9
Total Expenditure 10,699 13,840 16,618 19,146 21,189
Reserves & Surplus 36,337 40,808 45,567 49,147 57,230
EBIDTA 10,699 13,840 16,618 19,146 21,189
(% of Net Sales) 18.6 18.0 18.1 18.1 18.2 Shareholders fund 37,261 41,731 46,452 50,018 58,101
Depreciation& Amortisation 2,138 2,924 3,537 3,976 4,231 Total Loans 10,023 23,772 28,123 29,800 16,500
EBIT 8,561 10,916 13,081 15,171 16,958 Other Liabilities 1,646 6,956 7,972 8,041 8,071
Interest 3,120 4,146 4,290 5,063 5,110
Current Liabilities & Prov 33,854 31,230 41,983 47,363 54,465
Other Income 1,375 923 1,000 1,206 946
Total Liabilities 82,784 103,689 124,531 135,223 137,137
Exceptional item (140) (406) (352) (600) 0
PBT 6,675 7,287 9,439 10,714 12,794 Net Block 23,776 35,286 38,668 39,193 39,462
Tax 731 1,280 2,032 2,772 3,199 Investments 6,878 9,906 10,187 10,187 10,187
PAT 5,945 6,007 7,407 7,942 9,596 Other non-current assets 36,471 51,495 60,193 74,882 83,439
% chg 15.0 1.0 23.3 7.2 20.8 Cash & equivalents 15,659 7,002 15,482 10,961 4,049
Adj PAT 4,774 5,365 7,719 8,861 9,971
Total Current Assets 52,130 58,497 75,676 85,844 87,489
% chg (0.3) 12.4 43.9 14.8 12.5
Total Assets 82,784 103,689 124,531 135,223 137,137
Cash Flow (Y/E Mar) FY11 FY12 FY13 FY14E FY15E Key Ratios (Y/E Mar) FY11 FY12 FY13 FY14E FY15E
Profit before tax 6,816 7,693 9,791 10,714 12,794 EBITDA margin 18.6 18.0 18.1 18.1 18.2
(-) Tax (885) (1,242) (1,438) (2,772) (3,199)
Net Profit Margin 8.5 7.1 8.6 8.4 8.6
(+) Depreciation 2,138 2,924 3,537 3,976 4,231
(-)Change in Working Cap (1,884) (11,271) 1,043 (9,342) (1,457) RoE 14.2 13.6 17.5 18.4 18.4
(+)Others 1,964 3,516 4,059 5,150 4,954 ROCE 12.4 11.7 11.5 11.7 12.5
OCF 8,148 1,620 16,992 7,726 17,323 Inventory (days) 91.9 102.1 89.5 110.0 108.0
(-) Capex (6,960) (5,665) (4,457) (4,500) (4,500) Payable (days) 88.5 100.0 111.9 100.0 100.0
(-) investment (1,848) (933) (3,690) 0 0
Receivables (days) 96.7 132.9 116.2 115.0 115.0
(-) others) 0 0 0 0 0
Debt to Equity (0.3) 0.4 0.2 0.3 0.2
CFI (8,809) (6,599) (8,147) (4,500) (4,500)
(+) Net debt 2,888 2,180 6,372 1,677 (13,300)
(+) Net Equity 0 0 (2,235) (3,066) 0 Valuation parameter
(-) Dividend Payout (1,091) (1,156) (1,427) (1,295) (1,325) EPS 10.3 11.6 17.4 20.3 22.9
(+)Others (2,113) (3,305) (3,527) (5,063) (5,110) P/E 17.9 15.9 10.6 9.1 8.1
CFF (316) (2,282) (817) (7,747) (19,735)
P/S 1.5 1.1 0.9 0.8 0.7
Inc./(Dec.) in Cash (977) (7,260) 8,028 (4,521) (6,912)
Opng Cash balances 16,162 15,487 8,227 15,482 10,961 P/BV 2.3 2.0 1.8 1.6 1.4
Closing cash 15,185 8,227 16,255 10,961 4,049 EV / EBITDA 7.0 7.2 5.5 5.0 4.2

42
February 4, 2014
Bayer CropScience Ltd SELL

Parental advantage priced in
Recommendation Bayer CropScience (BCS) is a 69% subsidiary of the global major, Bayer AG Germany, a diversified chemical and healthcare
CMP(Rs) 1586 player. BCS India has 2 primary business, Agrochemical and Seeds. BCS has leadership position in India agrochemical space
Target(Rs) 1521
with market share of ~13%, it has production facilities in Himatnagar to manufacture a varieties of agrochemical like
fungicides, insecticides and herbicides. In seed business, it is sole distributor of Bayer seeds in India. Given its leadership
Upside % -4%
position in Indian agrochemical & rice seed business, Bayer is well placed to take advantage of upcoming seed revolution.
However at current price, we believe current valuation are factoring in best case scenario and hence recommend Reduce
Share Holding (%) on stock.
Promoter 69.0
Public 11.7 Rating Rationale
FII 8.5 • Leader in Indian market - BCS is a market leader in the Indian Agrochemical Sector with a market share of 13%. It also
DII 11.7 has 4% market share in Indian seed market. India consumes on average 0.6kg of pesticides per hectare (ha) compared
to 7kg/ha in USA and 12kg/ha in Japan. We believe that there exists a huge opportunity for BCS to grow its domestic
Key Data agrochemical business.
Average Vol(6m)(000) 19.5 • Increasing focus on seed - Seed contributed approximately 1% of total revenue in FY2009 which was at 15% in
FY2013 and is likely to keep increasing in foreseeable future. Given low penetration (less than 3%) of hybrid rice seed
FV 10
in India market, there is a huge potential for BCS to exploit.
Beta 0.3
Valuation factoring in best case scenario - over FY2011-13, BCS Sales & Adj PAT posted a CAGR of 12.9% & 38.5%. However
Mcap (Rs Mn) 62,400 going forward, we expect margin to contract as BCS's EBITDA margin have never remained above 13% in past decade. At
52 week H/L 1829 / 1065 current price stock is trading at 18.7x FY14 and 17.6x FY15x earnings estimate.
Bloomberg /Reuters BYRCS IN/BAYE.BO
Group B / S&P BSE 500 Risks to our call:
Sensex / Nifty 20,209 / 6,002 • Sustained current level of EBITDA margin - if company is able to hold or improve it from current level of margin it
would be have positive impact on valuation.
Stock Performance (%) • Higher than expected growth - We are building in CAGR of 16% in domestic business over FY13-15, any growth above
Abs(%) Sensex BAYER that would positively impact company valuation and stock price.
3M -3.1 -9.1 Year Revenue (Rs mn) PAT (Rs mn) EPS (Rs) EBIDTA Margin (%) P/E (x) EV/EBIDTA (x) PB (x) ROE (%) ROCE (%)
1Y 3.1 35.7 FY11 21,373 1,337 33.9 10.4 46.8 26.1 9.3 21.7 14.5
FY12 22,723 1,731 43.8 11.1 36.2 22.8 7.9 23.6 12.9
FY13 27,253 2,564 64.9 13.2 24.4 14.5 3.2 18.8 15.2
Analyst: Sageraj Bariya
Phone No.: 022-61925337 FY15E 37,249 3,308 90.3 13.2 17.6 9.7 2.8 17.2 16.8

43
February 4, 2014
Executive Summary
Rating Rationale Outlook and Valuation
Leader in Indian market - BCS is a market leader in the Indian Agrochemical We do believe BCS is well placed to take advantage of low agrochemical
Sector with a market share of 13%. India produces approximately 16% of the penetration and upcoming seed revolution. Overall, we estimate BCS to register
world's total food grain, but utilizes a mere 2% of pesticides. Given India a CAGR of 16.9% and 13.6% in Net Sales and Adj Profit over FY2013-15E,
consumes on average 0.6kg of pesticides per hectare (ha) compared to 7kg/ha respectively. However at current price stock is trading at 18.7x FY14 and 17.6x
in USA and 12kg/ha in Japan, we believe that there exists huge opportunity for FY15x earnings estimate. We estimate BCS core EPS to be Rs 69.4 & 78.7 in
BCS to grow its domestic business. BCS domestic business has grown at average FY14 & FY15 respectively. At target P/E of 16x and adding surplus cash, we
rate of 16.6% over FY09-13, higher than industry rate of ~15%. We believe this arrive at target price of Rs1521 against CMP of Rs 1586. Hence we recommend
is likely to continue going ahead on account of new product introduction and Reduce on the stock.
strong brand reputation evident from high market share.
Risk
Increasing focus on seed - BCS has traditionally been an agrochemical seller. Improvement in EBITDA margin - if company is able to improve its EBITDA
Seed contributed approximately 1% of total revenue in FY2009 which was at margin from current level it would be have positive impact on valuation.
15% in FY2013 and is likely to keep increasing in foreseeable future. BCS seed
Higher than expected growth - We are building in CAGR of 16% in domestic
division has grown at higher pace compared to its domestic agrochemical
business over FY13-15, any growth above that would positively impact company
business. BCS's seed business has grown at CAGR of 17.5% over FY09-13 against
valuation and stock price.
CAGR of 16.6% in domestic agrochemical business during the same time.
Globally, developed countries have already started witnessing slow or negative
growth in agrochemical business. Globally, market has been shifting towards
GM & Hybrid seeds as it eliminates need of agrochemicals.
Strong Financial performance to continue - All time best performance - BCS

posted a 14.8% CAGR in Sales to Rs 29 bn over FY2011-13, driven by 27.8%
CAGR in export, while domestic growth was muted at 11.5%. Over FY2011-13,
EBITDA Margins expanded from 10.4% in FY2011 to 13.2% in FY2013 as
contribution from high margin seed business increased. Going forward, we
expect Sales to register CAGR of 16.9% over FY13-15, driven by 15.9% & 20%
CAGR in domestic & export segment over same period. EBITDA margins have
been on upswing as contribution from seed business has increased, we are
maintaining same level going ahead. However on account of one time revision
in life of asset and higher future capex is likely to bump up depreciation
impacting EBIT. Hence, Adj PAT is likely to grow at CAGR of 13.6% over FY13-15.

44
February 4, 2014
Background Leader in Indian market

Bayer CropScience (BCS) is a 69% subsidiary of the global major, Bayer AG BCS is a market leader in the Indian Agrochemical Sector with a market share
Germany. Bayer AG is diversified chemical, healthcare and seed player. Bayer of 13%. India produces approximately 16% of the world's total food grain, but
AG acquired Aventis CropScience globally in 2002 and boosted its global utilizes a mere 2% of pesticides. Given India consumes on average 0.6kg of
leadership position in crop protection, pest control segment. BCS is one of the pesticides per hectare (ha) compared to 7kg/ha in USA and 12kg/ha in Japan,
leading player in india agrochemical industry with market share of~13%. BCS we believe that there exists huge opportunity for BCS to grow its domestic
has production facilities in Himatnagar where it manufactures a variety of business. BCS domestic business has grown at average rate of 16.6% over FY09-
agrochemical like fungicides, insecticides and herbicides. 13, higher than industry rate of ~15%. We believe this is likely to continue
going ahead on account of new product introduction and strong brand
Crop wise revenue mix reputation evident from high market share.
Paddy Global Agrochem sales by region

RoW
12% 4%
Cotton Lat-Am N.America

10% 19% 23%
other
63%
Vegetables Asia EU
10% 25% 29%
Fruits
5% Global Pesticides consumption (Kg/ha)
20
17
15 13
(Kg / ha) 12
10
7 7
5 5
5
0.6
0

45
February 4, 2014
Changing Business model - Focus on Seed and Outsourcing

Increasing focus on seed Leader in Rice seed market
BCS has traditionally been an agrochemical seller. Seed contributed As per National Seeds Association of India 2009 data, India hybrid rice market
approximately 1% of total revenue in FY2009 which stands at 15% in FY2013 was estimated to be worth US$ 45 mn annually. In volume terms rice market is
and is likely to keep increasing in foreseeable future. Globally, developed estimate to be of 40,000 metric tonnes per annum of which less than 3% is
countries have already started witnessing slow or negative growth in hybrid. Given abysmal low penetration of hybrid rice in India (<3%) that is bound
agrochemical business. Globally, market has been shifting towards GM & Hybrid to increase as government and farmers looks to increase yield.
seeds as it minimise need of agrochemicals. Bayer AG's seed business is carried out 2 entities in India namely, 1) Bayer
BioScience India (BSI) and 2) Bayer CropScience (BSC). BSI carries out operation
Revenue Mix of R&D and manufacturing seeds, while BSC takes care of marketing &
distribution. Bayer has above 40% share in India's hybrid rice market both value
100% 1% 3% and volume wise, as per 2009 study. We believe given Bayer's leadership
11%
15% position, company would be best positioned to take advantage and benefit
20% from the same.
75% 18%
16%
50% Structure of India’s hybrid rice seed market by volume and value
68% 100%
Other Other
25% 48% companies companies
75% Advanta Advanta

Ganga Kaveri Ganga Kaveri
Percentage
0% PHI Seeds PHI Seeds
FY09 FY13 50% Nath Seeds Nath Seeds
Insecticides Herbicides Fungicides Seeds Others
25% Bayer Bayer

Source: Company , Eisec Research Cropscience Cropscience
0%
Volume Value

46
February 4, 2014
New Products drive growth FY11

BCS's growth has primarily been driven by its ability to introduce new Agrochemical
agrochemical products at minimal R&D costs on and on account of having Solitude Soyabean
Ricestar Rice
access to its global parent's strong product portfolio. Notably, Bayer AG also
Nativo 75 WG Rice
has a strong R&D base. Over past 4 years, BCS has been introducing 3-4 products Glamore 80 WG Rice
every year under agrochemical and seed business. Going forward, BCS plans to Ricestar 6.9 EC Rice
introduce 6-8 new crop protection molecules and 13-14 new seed over next 3 8 new label extensions
years. 7 other molecules Export
Seed
New product introduction Arise swift Rice Hybrid Seed
8 Arize 6444 Gold Rice Hybrid Seed
SurPass Aasha Cotton Hybrid Seed
6
FY12
Agrochemical
4
Accord Plus Herbicide
6 new label extensions
2 Ethiprole 10% SC Export
Seed
0 Arize 6444 Gold Rice Hybrid Seed
FY10 FY11 FY12 FY13 Surpass SP 7007 BG II Cotton Hybrid Seed
Proagro 9450 Millet Hybrid Seed
Agrochem Seed
FY13
Agrochemical
Solomon 300 OD Brinjal
New Product Launches
Jump 80 WG
FY10 QuickBayt Housefly control
Agrochemical 10 new label extensions Bengal gram, Brinjal, Apple, Tea, Soybean, Tomato & Cotton
Glamore Rice Seed
Nativo Fungicide ProAgro 5121 Mustard Hybrid Seed
Adora Rice Arize 6129 Gold Rice Hybrid Seed
Seed ProAgro 7701 Gold Millet Hybrid Seed
Arize Prime Rice Hybrid Seed ProAgro 9444 Gold Millet Hybrid Seed
surpass SP 7007 BG II Cotton Hybrid Seed SurPass - First Class Cotton Hybrid Seed
ProAgro 9477 Millet Hybrid Seed Source: Eisec Research

47
February 4, 2014
Manufacturer-cum-Marketer to pure Marketer EBITDA (%)

BCS has embarked on strategy of turning itself from manufacturer & marketer 16
of agrochemical to pure marketer of agrochemical. In effort to this, BCS has
been selling of its various plants over the years and moving towards outsourcing 12
model. In 2012 BCS sold of its Thane plant for Rs 12.5 bn and in 2013 BCS sold
of its Ankleshwar, Gujarat plant for Rs 1.3bn 8
Fund raised through real estate sell off was return to shareholder through
buyback in which promoter also participated and balance was retained for 4
further investment in existing business operation and expansion.

0
CY2004
CY2005
CY2006
FY2008*
FY2014E
FY2015E
FY2009
FY2010
FY2011
FY2012
FY2013
Strong Financial performance to continue
All time best performance - BCS posted a 14.8% CAGR in Sales to Rs 29 bn over
FY2011-13, driven by 27.8% CAGR in export, while domestic growth was muted
Source: Company , Eisec Research | * - 15month
at 11.5%. Over FY2011-13, EBITDA Margins expanded from 10.4% in FY2011 to
13.2% in FY2013 as contribution from high margin seed business increased. EBITDA margins have been on upswing as contribution from seed business has
Going forward, we expect Sales to register CAGR of 16.9% over FY13-15, driven increased, we are maintaining same level going ahead. However on account of
by 15.9% & 20% CAGR in domestic & export segment over same period. one time revision in life of asset and higher future capex is likely to bump up
depreciation impacting EBIT. Hence, Adj PAT is likely to grow at CAGR of 13.6%
Revenue Mix over FY13-15.
44,000
3,200 60
33,000
2,400 40
( Rs mn)
22,000
1,600 20
11,000
800 0
-
FY2011 FY2012 FY2013 FY2014E FY2015E
- (20)
Domestic Export
FY2011 FY2012 FY2013 FY2014E FY2015E
Adj PAT % yoy

48
February 4, 2014
Outlook & Valuation P/E Chart

The Agriculture Sector has been under governments & industries focus for 2,000
long time now. Food security has been top priority for the government while
reduction in food loss is one of the easiest ways to boost food production. 1,500
While usage of agrochemicals can reduce the loss of food production, there is
a limit. Hence the need of the hour is increasing crop yield with help of using
better quality seed. Country has already seen one green revolution and is in ` 1,000
dire need of another.
BCS is a market leader in the Indian Agrochemical Sector with a market share 500
of 13%. Given India consumes on average 0.6kg of pesticides per hectare (ha)
compared to 7kg/ha in USA and 12kg/ha in Japan, we believe that there exists
huge opportunity for BCS to grow its domestic business. -
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Seed contributed approximately 1% of total revenue in FY2009 which was at
15% in FY2013 and is likely to keep increasing in foreseeable future. Given low Price 5x 9x 13x 17x 21x
penetration (less than 3%) of hybrid rice seed in India market, there is a huge
potential for BCS to exploit.
We do believe BCS is well placed to take advantage of low penetration of
agrochemical penetration and upcoming seed revolution. Overall, we estimate
BCS to register a CAGR of 16.9% and 13.6% in Net Sales and Adj Profit over Risk to our call
FY2013-15E. However at current price stock is trading at 18.7x FY14 and 17.6x
Improvement in EBITDA margin - if company is able to improve its EBITDA
FY15x earnings estimate. We estimate BCS core EPS to be Rs 69.4 & 78.7 in
margin from current level it would be have positive impact on valuation.
FY14 & FY15 respectively. At target P/E of 16x and adding surplus cash, we
arrive at target price of Rs1521 against CMP of Rs 1586. Hence we recommend Higher than expected growth - We are building in CAGR of 16% in domestic
Reduce on the stock. business over FY13-15, any growth above that would positively impact company
valuation and stock price.
FY2015E Decrease in competition - Any decrease in competitive activity could prove
Target P/E 16.0 bonus for BCS.
Core EPS 78.7
Target price 1,259
add cash per share 262
Total Value of share 1,521
CMP 1,586
Return (%) (4)

49
February 4, 2014
Financial Summary
Net Sales 21,373 22,723 27,253 32,946 37,249 SOURCES OF FUNDS
% chg 24.0 6.3 19.9 20.9 13.1
Total Expenditure 19,142 20,196 23,654 28,597 32,332
Reserves & Surplus 6,335 7,532 18,918 17,281 20,354
EBIDTA 2,231 2,527 3,599 4,349 4,917
Shareholders fund 6,730 7,927 19,313 17,647 20,720
(% of Net Sales) 10.4 11.1 13.2 13.2 13.2
Total Loans 0 0 0 0 0
Depreciation& Amortisation 327 340 366 513 571
Deferred Tax Lia 0 0 18 18 18
EBIT 1,904 2,187 3,233 3,836 4,346
Interest 83.0 17.0 37.0 40.7 44.8 Current Liabilities & Prov 8,867 10,480 4,819 6,130 7,062
Other Income 205 453 689 842 636 Total Liabilities 15,597 18,407 24,150 23,795 27,800
Exceptional item 38 579 (11,747) 0 0 Net Block 3,440 2,449 2,157 2,024 3,954
PBT 1,988 2,044 15,632 4,637 4,938 CWIP-Tangibles 61 80 1,271 2,500 200
Tax 672 654 4,015 1,530 1,629 Intangibles 36 29 29 19 9
PAT 1,316 1,390 11,617 3,107 3,308 CWIP-Intangibles 0 8 0 0 0
% chg 3.4 5.6 735.8 (73.3) 6.5 Investments 728 756 780 780 780
Adj PAT( After Minority Int.) 1,337 1,731 2,564 3,107 3,308
Deffered tax 60 104 0 0 0
% chg (1.2) 29.5 48.1 21.2 6.5
Other non-current assets 7,642 10,682 10,172 11,298 13,271
Total Current Assets 11,272 14,981 19,913 18,471 22,857
Cash Flow (Y/E Mar) FY11 FY12 FY13 FY14E FY15E
Total Assets 15,597 18,407 24,150 23,795 27,800
Profit before tax 1,988 2,044 15,632 4,637 4,938
(-) Tax (555) (740) (1,226) (1,530) (1,629)
(+) Depreciation 327 450 462 513 571 Key Ratios FY11 FY12 FY13 FY14E FY15E
(-)Change in Working Cap (640) (637) (1,197) 193 (1,053) EBITDA margin 10.4 11.1 13.2 13.2 13.2
(+)Others 103 (50) (12,288) (41) 66 Net Profit Margin 6.3 7.6 9.4 9.4 8.9
OCF 1,223 1,067 1,383 3,771 2,892 RoE 21.7 23.6 18.8 16.8 17.2
(-) Capex 1,927 (496) 6,456 (1,517) (211) ROCE 14.5 12.9 15.2 16.0 16.8
(-) investment 24 1,381 (2,186) 0 0 Inventory (days) 67.1 75.2 66.9 70.0 70.0
(-) others) Payable (days) 56.3 48.3 32.8 40.0 40.0
CFI 1,951 885 4,270 (1,517) (211)
Receivables (days) 40.9 43.2 38.7 40.0 41.0
(+) Net debt (55) (1,085) 0 0 0
Debt to Equity (0.5) (0.5) (0.5) (0.4) (0.5)
(+) Net Equity 0 0 0 (4,550) 0
Valuation parameter
(-) Dividend Payout (184) (183) (193) (231) (223)
Adj EPS 33.9 43.8 64.9 84.8 90.3
(+)Others (85) (17) (20) (41) (45)
CFF (324) (1,285) (213) (4,822) (268) P/E 46.8 36.2 24.4 18.7 17.6
Inc./(Dec.) in Cash 2,850 667 5,440 (2,568) 2,413 P/S 2.9 2.8 2.3 1.8 1.6
Opng Cash balances 777 3,627 4,294 9,741 7,173 P/BV 9.3 7.9 3.2 3.3 2.8
C/s Cash balances 3,627 4,294 9,734 7,173 9,586 EV / EBITDA 26.1 22.8 14.5 11.5 9.7

50
February 4, 2014
Stock rating (1 year target scale) DISCLAIMER

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0-10% - Reduce to buy or sell a security. Recipients of this document should be aware that past performance is not necessarily a guide for future performance. Although the information contained in this
document has been obtained from reliable sources, its accuracy or completeness has not been fully verified by EISEC independently and cannot be guaranteed. Neither EISEC nor any of its
10-30% - Accumulate affiliates, its directors or its employees accepts any responsibility, of any nature, for the information, statements and opinion given or expressed herein or for any omission or for any liability
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Institutional Research

Agrochemical Sector Report

Are generic players gaining share or are innovators exiting? ..............…...........................................................................…..…….. 10

Slowing rate of new molecule introduction ..............…......................................................................................................…..…….. 10

Changing Business Model - Focus shifting from Agrochemical to Seed ..............…................................................................…….. 11

Is cost of inventing seed lower than agrochemicals? ..............…............................................................................................…….. 12

Future Outlook ………………………………………..................................................….....................................................................…..…….. 13

Key Challenges …….…………………………………..................................................…....................................................................…..…….. 13

Rallis India Ltd ……………………………….............................………………………………………………................................…..........……………. 17-30

UPL Ltd ……………………………………………………………....................………………………………................................….........…………………… 31-42

Bayer CropScience Ltd ……………………………………………………....………………………………................................….........………………...… 43-50

Agrochemical Sector Report

Agrochemical Sector Report

The Basics Size & Scale - Global & India

Agrochemical Sector Report

Global Agrochem sales by region

Key Markets and Consumption Global Pesticides consumption (Kg/ha)

Agrochemical Sector Report

Pesticides Classification and Market share - Global and India

Source: Eisec Research, Industry

Agrochemical Sector Report

India’s Changing Pesticides Consumption Pattern

Agrochemical Sector Report

Key consuming crops

covers 5% of total area under cultivation, however it consumes 50% 6,000

Agrochemical Sector Report

Company Insecticides Herbicides Fungicides Others

Source: Eisec Research, Industry

Source: Eisec Research, Industry

Agrochemical Sector Report

Trend Slowing rate of new molecule introduction

50% 33% 32% 6

Source: Eisec Research, Industry

Agrochemical Sector Report

400 210 184

Agrochemicals Seed and Traits 70

Agrochemical Sector Report

Agrochemical Sector Report

Future Outlook Key Challenges

Agrochemical Sector Report

Seed the next growth frontier

Source: Eisec Research, Industry

US$ mn 2005 2006 2007 2011 CAGR (2005-11)

NAFTA 9,300 9,100 9,200 8,412 -1.70%

Lat-America 5,200 5,000 5,900 10,060 11.60%

Europe 9,350 9,500 11,000 12,196 4.50%

Asia 9,300 9,100 9,300 11,607 3.80%

RoW 1,750 1,800 1,850 1,740 -0.10%

Source: Eisec Research, Industry

Agrochemical Sector Report

India Crop-wise growth in distribution of seeds (%)

Agrochemical Sector Report

Agrochemical Sector Report

Rallis India Ltd ACCUMULATE

Share Holding (%) Investment Rationale

Agrochemical Sector Report

Agrochemical Sector Report

Background Business Turnaround