Batlivala & Karani

SECTOR REPORT 15 April 2009

Agrochemicals and Seeds

Agri (India) Shining
• Limited scope for improving arable land and fall in crop response
to fertilisers remains key challenges for growth in agricultural
productivity in India.

• Increase in seed replacement rate (currently <20%), improvement

in usage of hybrid seeds and rising awareness of GM seeds augur
well for seed manufacturers to help enhance productivity in available
land.

• Pesticides industry will get its boost with increase in cropped area
treated with pesticides (currently <20%) and there is a significant
opportunity for exports to European Union and North America.

• Bayer CropScience, Monsanto India and Rallis India are our top
picks within the agrochemical and seeds sector.

G. Vijayaraghavan
g.vijayaraghavan@bksec.com
+91-44-2846 6917
B&K RESEARCH APRIL 2009

Index ........................................................................... Page No.

Executive summary ............................................................................................. 4

Key growth drivers .............................................................................................. 6

Key concerns for the sector .............................................................................. 10

Valuation approach for the sector ..................................................................... 12

Industry background ......................................................................................... 14

Other developments .......................................................................................... 32

Companies ...................................................................... 38-121

Monsanto India ............................................................................................ 38

Rallis India ................................................................................................... 54

Bayer CropScience ....................................................................................... 66

United Phosphorus ...................................................................................... 76

Advanta India .............................................................................................. 86

Kaveri Seed .................................................................................................. 97

Bhagiradha Chemicals and Industries ............................................................. 107

Excel Crop Care ........................................................................................ 112

JK Agri Genetics ........................................................................................ 117

Punjab Chemicals and Crop Protection .......................................................... 121

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 B&K RESEARCH APRIL 2009

Key highlights
• Improving agriculture prospects will provide growth opportunity of 20-25% for
seed sector and 10-15% for pesticides sector in India, going forward.

• We like companies with exposure to high growth segments (hybrid rice and hybrid
corn in seeds, branded generic players in pesticides) within the agrochemical and
seed sector in India.

• High cost inventory and expected fall in pesticide prices (leading to destocking at
dealer level) will haunt the performance of the companies in 4QFY09 and 1QFY10.
This should be used as an opportunity to increase the exposure to the sector from
the long-term perspective.

• Pesticide consumption in India is less than 600 gm/ha versus world average of 6
kg/ha and only 20% of the cropped area is treated with pesticides, signifying the
scope for increase in consumption.

• Further, Indian agrochemical companies are leveraging their low cost

manufacturing base to tap the opportunity in international markets. Pesticides
exports have grown at 17% CAGR between FY04 and FY08.

• Seed replacement rate in India is less than 20%. With the hybridisation acreage of
less than 2% in rice, 50% in maize and no breakthrough hybrids in wheat as yet,
there is abundant growth opportunity within the seed sector in the offing. Approval
and development of new GM crops will give further impetus to the sector.
Key beneficiaries – Valuation matrix
Company CMP Target Net sales EPS growth RoCE EV/EBITDA PER
price (Rs mn) (%) (%) (x) (x)
(Rs) (Rs) FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E
Top picks
Bayer CropScience 250 474 13,660 15,207 95.5 23.9 32.9 32.7 6.3 5.2 10.5 8.5
Monsanto India 1,421 1,846 4,337 4,982 38.3 11.6 34.5 30.9 10.5 8.7 14.0 12.5
Rallis India 448 622 8,286 9,592 103.6 15.9 31.8 32.1 4.3 3.4 7.5 6.5
Outperformers
United Phosphorus 114 140 50,100 55,992 38.6 30.5 19.1 19.4 6.9 5.8 9.6 7.4
Advanta India* 468 521 6,739 7,492 13.1 21.9 13.8 14.9 7.8 6.6 13.1 10.7
Kaveri Seed Co. 168 197 1,191 1,446 47.8 28.7 23.3 23.0 8.1 6.0 9.9 7.7
*CY09E and CY10E.

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 B&K RESEARCH APRIL 2009

Executive summary
India’s food grain production has increased from 108 mn tonne in 1970 to 230 mn tonne
in 2008, with the area under cultivation remaining stable at ~125 mn hectares (ha). Most
of the improvement in productivity has come through the adoption of high yield variety
seeds, improvement in irrigation facilities and increase in the usage of fertiliser. Indian
Institute of Soil Science attributes 50-55% of the improvement in crop productivity to
fertiliser input. In the past three decades, high yield variety seeds ignited the revolution in
the crop productivity while fertiliser was the fuel that powered its forward thrust.

Population and food grain production in India

1,200 250
1,000 200
800
150

'000 tn
mn

600
100
400
200 50
0 0
1951 1961 1971 1981 1991 2001 2007
Population (LHS)
Total Food grain production (RHS-tn)
Per capita food grain production (RHS)

Source: Ministry of Agriculture (MoA)

Fertiliser response ratio Index of fertiliser consumption and yeild of key crops
60 150
Kg food grain / Kg of fertiliser

Rice Wheat Fertilis er

50 140

40 130

120
30
110
20
100
10
90
0
FY98

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

1971 1981 1991 2001 2008

Source: PAU Source: MoA

However, the imbalanced use of fertiliser, intense cropping systems, and environmental
degradation has led to declining crop response to the fertilisers. According to Punjab
Agriculture University, response ratio for per kg of fertiliser used in India has declined
from 50 kg in 1970s to 10 kg of grain in 2008. While initiatives are taken up for
improving the balanced fertiliser usage, there is also focus on increasing the agriculture
productivity by raising the seed replacement rates, increasing the usage of hybrid and
genetically modified (GM) seeds, and protecting the crops from pest attacks with
appropriate usage of pesticides.

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 B&K RESEARCH APRIL 2009

Seed replacement rate in India Pesticide consumption

90 18
75 15
60 12

Kg / ha
45
%

9
30 6
15
3
0
0
Wheat

Bajra
Sunflower

Cotton
Rice

Maize

Korea
USA
China

India
Taiwan

Japan

France

Pakistan
UK
Source: MoA Source: Rallis India

Overall, seed replacement rate in India is less than 25% and only 20% of the cropped
area is treated with pesticides. Pesticide consumption in India is less than 600 gm / ha
versus world average of 6 kg / ha, signifying the scope for increase in consumption.
India’s tropical climate has been conducive for around the year activity of pests.
Crops compete with 80,000 plant diseases, 30,000 weed species, 10,000 insects and
3,000 worms (source: TNAU). Increasing awareness, skewed consumption pattern
and rising labor costs are set to drive the growth of pesticide industry in India. Further,
Indian agrochemical companies are leveraging on their low cost manufacturing base
to tap the opportunity in international markets. Pesticides exports have grown at 17%
CAGR between FY04-08. With the hybridisation acreage of less than 2% in rice, 50%
in maize and no breakthrough hybrids in wheat as yet, there is abundant growth
opportunity within the seed sector in the offing. Approval and development of new
GM crops will give further impetus to the sector.

Hybridisation of key crops in India Hybrid seed market

90 60
75 50
40
60
Rs bn

30
45
%

20
30
10
15 0
0 FY07 FY08 FY09 FY13
Bajra
Sunflower
Maize

Cotton
Rice

Cotton Maize Hybrid Paddy

Jowar Bajra Sunflower
Others

Source: Industry Source: Industry

AGROCHEMICALS AND SEEDS 5

 B&K RESEARCH APRIL 2009

Key growth drivers

Need for higher productivity driving demand for agri inputs
India CAGR (1991-07)
The limited availability of land and the rising demand for food with the continuously
2.0 growing population, compelling the need for greater productivity from agriculture.
1.83
1.6 India has the second largest arable land, of which 58% is irrigated. The land under
1.2 food grain cultivation has remained at ~ 121 mn ha for the past two decades. Average
%

1.05 net per capita availability of food grains per year has fallen from 174 kg between
0.8
1991-2000 to 163 kg between 2001-2007. India’s population is expected to grow at
0.4
a CAGR of 1.1% p.a. and the demand for food grains is expected to increase at a
0.0
CAGR of 1.4% p.a. Coupled with low yields and huge crop losses, the gap between
Population

Food grain
production

production of food and the demand for it has been ever widening. This widening gap
has raised prospects for companies in agriculture-inputs like seeds, pesticides and
Source: FAO, MoS micronutrients. Thus use of high yielding seeds to increase production and quality
agrochemicals to improve the protection of crops is the need of the hour. Growing
shortage of seeds has already increased seed prices by 5-7%. With growing food
requirement and increase in realisation for farm produce, we see abundant growth of
25% and ~10% in seeds and agrochemicals waiting to be tapped in India.
Agriculture production and demand drivers

Agriculture production in India

Production drivers Demand drivers

- Increasing seed replacement rate and - Increasing population

use of hybrid seeds - Increasing urbanisation
- Adoption of GM technology - Rising income, increases the demand
- Increasing area under irrigation for high protein food and meat
- Proper usage of fertiliser - Rise in use of agriculture produce in
- Improving agriculture practice other activities such as for feed, fuel,
- Protecting crop from pest attack etc.
- Reducing crop loss in storage - Limited resource (land and water)
- Innovative practices - Changing weather and climate

Source: B&K Research

AGROCHEMICALS AND SEEDS 6

 B&K RESEARCH APRIL 2009

Cropland in use and total suitable land (mn ha)

1,066 1,031
874

497
366 220 99

203 228 232 207 86 387 265

and Carabeen

Sub-Sahara
Latin America

Africa

East Asia

South Asia

Near East and

North Africa

Industrial
countries

Transition
countries
Source: FAO

Food consumption Population and food grain production in India

3,500 1,200 250
Daily calories per capita

3,000 1,000 200

2,500 800
150

'000 tn
2,000
mn
600
100
1,500 400
1,000 200 50
500 0 0
0 1951 1961 1971 1981 1991 2001 2007
Brazil China India Population (LHS)
Total Food grain production (RHS-tn)
1990-92 1998-00 2003-05 Per capita food grain production (RHS)

Source: FAO Source: MoA

Low seed replacement, and hybrid and GM seeds

The introduction of hybrid technology in seeds has given fillip to the seed sector. The
seeds sector has been witnessing phenomenal growth of 20-25% in India. Though
many private players have tapped the Indian hybrid seeds market, the gap in relative
productivity levels of Indian versus the international peers has been the driving force
in the seeds space. Given that just less than 2% of rice, the largest cultivable crop in
India, is under hybrid seeds and less than 50% hybridisation in maize, phenomenal
Seeds sector is expected to growth of more than 25% is waiting to be tapped in India.
grow by 20-25%
With the onset of global warming, the need for drought resistant and pest resistant
seed varieties is being recognised. Bt cotton, the only approved GM crop in India, has
seen rapid growth in adoption since commercialisation. Total area planted with Bt
cotton has increased from 70,000 acres in 2003 to 17.2 mn ha in 2008. With the
controversies about the GM crop approval, no other GM crop is approved for
commercialisation. Despite various hurdles such as court litigations, protests by NGOs,
etc agriculture biotechnology is able to achieve slow but steady growth in India. The
various crops with different genes-traits combinations are under various stages of

AGROCHEMICALS AND SEEDS 7

 B&K RESEARCH APRIL 2009

developments in India including major crops like rice, mustard, corn, brinjal, potato, okra,
etc. Research activities in most of these crops are in the advanced stage of development,
large scale field trials. The launch of first GM food crop, Bt brinjal, is expected in 2009.
Though companies like Kaveri and Advanta (sorghum portfolio) offer temporary solace,
field trials by Monsanto India for GMO’s in drought resistant(yield guard seeds) and
glyphosate tolerant crops(Round up resistant) are targeting an India launch by 2011.

Seed replacement rate in India Hybridisation of key crops in India

90 90
75 75
60 60
45 45
%

%
30 30
15 15
0 0
Wheat

Bajra
Sunflower

Cotton
Rice

Maize

Bajra
Sunflower

Cotton
Rice

Maize
Source: MoA, Industry
Usage of agrochemicals very low compared to world average

In agrochemicals, usage of pesticides by Indian farmers is the lowest in the world (0.6
kg/ha compared to the world’s average of 5 kg/ ha). India faces a crop loss of Rs 900-
1,200 bn. With greater private participation and rising awareness levels of farmers,
pesticide sales in India have seen a rise. Besides, fertiliser players have also been
selling pesticides as a combined package. Growing income levels on the back of rise in
commodity prices has been encouraging greater usage of agri-inputs by farmers to
protect the yield. Though Bt cotton has drastically reduced the sale of insecticides,
emergence of secondary pests has given some respite to pesticide companies. Thus
greater awareness and rising income levels coupled with the need for greater yields
has been driving the consumption of agrochemicals in India.

Pesticides consumption
Countries Consumption (kg/ha)
Taiwan 17
China 14
Pesticides usage in India
Japan 12
• Only 20% of cultivated area USA 7
treated with pesticides Korea 7
France 5
• Crop losses estimated at
UK 5
Rs 900-1,200 bn
Pakistan 1
India 0.6
Source: Rallis

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 B&K RESEARCH APRIL 2009

Government’s plan to achieve 4% growth in agriculture

Indian Government has been showing increased focus towards achieving 4% growth in
Promoting branded agri inputs agriculture. Of late the government has been encouraging better private participation
in agribusiness. The government has laid down many incentives for seed producers,
including tax sops (1.5x the cost of research) introduced for players into seeds’ research.

Indian agriculture sector, besides providing food security for the world’s second most
populous country, is the mainstay of the Indian economy. The government is taking
focused initiatives to improve the growth of agriculture sector to 4% during the
eleventh plan period (2007-2012), versus 2.5% growth during the tenth plan period
(2002-2007). Initiatives such as Natioanl Agriculture Development Program (NADP/
RKVY), National Food Security Mission (NFSM), National Horticulture Mission
(NHM), National Rural Employment Guarantee Scheme (NREGA), Farm Loan Waiver,
Source: Ministry of Consumer Affairs subsidised fertiliser and intensification of efforts through Watershed Programmes,
Bharat Nirman, and BRGF in the rural sector present new opportunities for leveraging
agricultural growth.

Global opportunity in export of agrochemicals (average growth of

~15-20%)
Indian agrochemical players have been seeing incremental opportunities in exports.
The inherent advantage in terms of low cost manufacturing base gives them an edge
over their international peers, pesticides exports increased from Rs 17 bn in FY04 to
Rs 32 bn in FY08, CAGR of 17%. The global opportunity in generic agrochemicals is
seen at US$ 4-5 bn. Key players like United Phosphorus, Bayer CropScience, Rallis
India, Excel Crop Care and Bhagiradha Chemicals have plans to grow exports by more
than 10% annually. Though volatility in the rupee movement against the USD may
impact export revenue, the low cost advantage makes India a preferred import

Exports witnessed a CAGR destination. A growth of 10-15% is seen in exports from India, over the next few years.
of 17% between FY04-08 Pesticides export from India
35

30
25

20
Rs bn

15

10

0
FY02 FY03 FY04 FY05 FY06 FY07 FY08

Source: Department of Chemicals and Petrochemicals

AGROCHEMICALS AND SEEDS 9

 B&K RESEARCH APRIL 2009

Key concerns for the sector

Increasing volatility in input costs for agrochemical companies
Indian players source raw material requirements from China. In recent times, Chinese
imports are loosing their sheen due to rising manufacturing costs and higher export
duty (export duty on yellow phosphorus increased from 20% in 2007 to 120% in
2008). Earlier, taking advantage of lenient affluent norms, export rebates and easy
credit availability, Chinese manufacturers were able to manufacture low cost chemical
intermediates. Now, increasing operating expenses with stricter environmental and
affluent norms by the Chinese government (post Olympics) and reducing export
rebates have been affecting agrochemical manufacturers in China. Thus non availability
of low cost raw materials, volatility in the raw material prices is impacting Indian
agrochemical players.

Threat from GM crops, affects agrochemical sales

With the growing demand of genetically modified crops, many crop protection
companies face the threat of decreasing demand. In CY07, spurt in cultivation of Bt
cotton has resulted in decreasing demand for insecticides in India. Conventional
cotton was the largest consumer of insecticides earlier. With wide acceptance of Bt
cotton, insecticides consumption dropped from 72% in 2001-02 to 62% of total
pesticides in 2006-07.With many more GM crops in the pipeline for approval by
2010, demand for pesticides may be significantly affected if approved.

Impact of GM crops on pesticide sales in India

2005-06 2007-08 2008-09 2010-11

Introductions Bt Cotton Bt Cotton Disease resistant – vegetables, quality Herbicide (glyphosate) tolerant maize,
traits in vegetables vegetables, etc.

Special traits Bollworm Caterpillar Resistance to caterpillars and few Tolerance to total herbicides
resistance resistant fungal diseases, Increased pulp in tomato

Impact on total 10-12 10 5-8 3

pesticides sale (%)
Source: Industry
Spurious products – affects sales and perception towards products
The availability and sale of spurious pesticides products and GM seeds impacts the
pesticide and Bt cotton seed companies sales and farmers perception towards these
products. According to Agrochemicals Policy Group, spurious and substandard
pesticides worth around Rs 12 bn are sold to unwary farmers every year. Over 5 mn
packets of unapproved spurious Bt cotton seed were sold in the country in 2008.

AGROCHEMICALS AND SEEDS 10

 B&K RESEARCH APRIL 2009

Dependence on erratic environmental conditions

The revenue of agriculture input companies depends on weather conditions, which
results in erratic earnings in agribusinesses. ~60% of cultivable lands in India are
dependent on monsoons for their water requirements. Global warming and the resultant
volatility in temperatures are also affecting the productivity of existing crops, thus
disrupting income levels of the farmers. The sale of agriculture inputs shares a high
correlation with income levels of farmers. With extreme temperatures becoming a
normal phenomenon now, we see incremental risk associated with agribusiness in future.
Climate – inherent risk of
agriculture sector Monsoon and food grain production
25
20
15
10
5
%

0
(5)
(10)
(15)
(20)

2007-08*
1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07
Mons oon (departure from normal) Food grain production (YoY)

Source: IMD, MoA

Stagnant sales for global agrochemicals – introduction of new

molecules diminishing
Flat sales volume and Global crop protection sales have been seeing a flat growth of ~5%. With a slowdown
slowing discovery of new in discovery of new molecules in agrochemicals, revenue of the global agrochemical
molecules industry has been stagnant over a decade now, barring 25% growth in 2008. Though
crop production and biotechnology are emerging as the new drivers of growth, declining
opportunities in crop protection remain a key concern for players. However, off patented
(70% of the molecules) products with a potential market of US$ 4-5 bn over the next 4-
5 years has allayed fears of generic agrochemical players to a large extent.

Global agrochemical market

45

40

35
Rs bn

30

25

20
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Phillips McDougall

AGROCHEMICALS AND SEEDS 11

 B&K RESEARCH APRIL 2009

Valuation approach for the sector

We have used a relative valuation method to value companies in the sector. Most agri
input companies in the agrochemical and seeds segment covered by us have been
valued on a Price/Earnings basis. Earnings of agrochemical and seed companies are
highly dependant on weather and climatic conditions. Though growth of core business
can be estimated, their dependence on weather results in fluctuating cash flows. Further
the companies belong to a growing market, a Price/Earnings based valuation method
appears to be the most feasible and simple method to be followed. However, other
methods like an EV/EBITDA based valuation or Price/Book value are also other
feasible methods.
Key parameters for evaluating agrochemical and seed companies
Agrochemical sector Seeds sector

1. R&D capabilities 1. Germbank/germplasm

2. Raw material sourcing capability 2. Experience of breeders

3. Depth of the distribution network / 3. How dynamic the company is with introduction
reach to the farmer of new products each season

4. Product popularity within the 4. Product popularity within the farming community
farming community

Though, the agrochemical sector has been witnessing only a marginal growth over the
past decade, rise in commodity prices has given a fillip to the pesticide prices as well.
Pesticides prices have risen by around 10-15% on an average, in 2008 resulting in a
good growth of 25% for the global agrochemical sector. Though volatility in the raw
Top picks: material and crop prices remains our key concern, growing demand for better yields
Bayer CropScience would see the sector growth maintained at 3-5% levels in volume terms in the future.
Monsanto India
Rallis India With growing hybridisation within the sector, the seed sector has been seeing good
growth of 15-20% in India. Hybridisation is set to drive the Indian seeds space over
the next couple of years. With growing labour cost we would see mechanisation in
Indian agriculture in the future. Though Indian seed companies face stiff competition
from MNC’s due to limited investment into biotechnology/ GMO’s, with recent
government incentives, Indian seed companies have taken initial steps in this direction.
With growing food shortages, food inflation and the introduction of GM crops in
future (over the next 3-5 years) we would see the seed sector growth maintained at
double digit levels in future too.

Our top picks within the agrochemical and seed sector are Bayer CropScience,
Monsanto India and Rallis India. Bayer’s core business, with the leadership in the
respective market, pesticides and hybrid rice is well positioned to tap the growth
opportunity within the sector. With key developments and growing possibility of the

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 B&K RESEARCH APRIL 2009

Thane land sale (to contribute Rs 178 to the per share value of Bayer), Bayer looks
attractive within the sector. Monsanto, the leader in Indian hybrid corn segment and
herbicides, is set to benefit with the increase in corn hybridisation and growing
agriculture labor shortage. Further access to parent’s research will help Monsanto
maintain the leadership in the business segment. Rallis India is expected to benefit
from the improvement in the operational efficiency, launch of new products through
alliance route and increasing focus on export opportunities. Rallis India, a debt free
company, also remains our top pick within the sector.
Valuation comparison
Company CMP CY08-10E CAGR (%) P/E (x) EV/EBITDA (x) RoE (%) P/BV (x)

(Rs) Revenue EPS FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E

Bayer CropScience 250 14.3 39.2 10.5 8.5 6.3 5.2 22.9 23.1 2.2 1.8

Monsanto India 1,421 17.1 24.2 14.0 12.5 10.5 8.7 26.2 26.6 3.7 3.0

Rallis India 448 19.6 54.0 7.5 6.5 4.3 3.4 21.7 21.6 1.5 1.3

United Phosphorus 114 26.2 34.5 9.6 7.4 6.9 5.8 21.2 22.6 1.9 1.5

Advanta India 468 13.0 17.0 13.1 10.7 7.8 6.6 11.3 12.3 1.4 1.3

Kaveri Seed Co. 168 22.3 37.9 9.9 7.7 8.1 6.0 20.0 21.0 1.8 1.5
Source: B&K Research

Global peers
Company Country CMP CY08-10E CAGR (%) P/E (x) EV/EBITDA (x) RoE (%) P/BV (x)

Revenue EPS FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E

Monsanto USA 78 11.6 21.1 16.7 14.7 9.8 8.8 25.3 25.0 3.8 3.3

Bayer AG Germany 37 0.4 32.1 11.0 9.6 6.7 6.1 12.8 13.6 1.6 1.5

Nufarm Australia 12 15.4 34.1 10.9 9.5 8.7 7.9 15.8 16.2 1.7 1.5

Isagrow Italy 3 9.8 - 10.6 7.0 7.3 5.9 3.9 9.0 0.6 0.6

Syngenta Switzerland 218 3.2 15.2 11.0 9.8 7.7 7.1 23.2 22.7 2.6 2.2

MAI Israel 1,735 0.6 330.5 8.8 7.5 5.9 5.5 16.5 16.4 1.3 1.1

FMC USA 45 5.0 14.9 9.1 8.3 5.5 5.3 36.2 33.7 3.4 2.6
Source: Bloomberg

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 B&K RESEARCH APRIL 2009

Industry background
The Indian agrochemicals market
The Indian Crop protection market, worth US$ 1 bn, has been evolving over time. In
1975, Government’s law to divert 50% of manufacturing of active ingredients to
small scale formulators broke the monopoly of MNC’s in the Indian agrochemical
Industry giving rise to generic agrochemicals. As India recognised only process patents,
generic agrochemicals thrived. After India became a signatory of the WTO, product
patents were also recognised in India which encouraged MNC’s to introduce new
chemistries in India. However, spurious versions of generic and patented products
still thrive in the Indian market. Though the Government has introduced data
protection law, offering data protection for new molecules for 3-5 years, the industry
awaits its implementation eagerly.

Sector dynamics

Shift in consumption pattern

Pesticide consumption pattern
The Indian agrochemical sector has been typically dominated by consumption of
Pesticide type (%) Global India insecticides given its climatic conditions which result in higher incidence of insects in
Insecticides 25 62 fields. With the introduction of Bt cotton in India, consumption of insecticides declined

Herbicides 48 21
from 72% to 62%, with consumption by the cotton crop falling from 35% to 26%.
Following global trends, this decline in insecticides has been compensated by increasing
Fungicides 24 17
consumption of herbicides and fungicides given increasing cultivation of fruits and
Total 100 100 vegetables and usage of hybrid seeds.

Crop-wise pesticide consumption Consumption pattern in India

Crops Share of total pesticide FY06 FY08

consumption (%)
12% 17%
16%
before today

Cotton 35 26

Rice 23 29
72% 21% 62%
Vegetables 8 9
Ins ecticides Herbicides Fungicides
Pulses & oilseeds 7 9
Source: Rallis
Wheat 8 8
Move towards the usage of safer products and biopesticides
Fruits 5 6
Indian agrochemical industry is moving towards the usage of safer products and
Chillies 4 4
traditional agriculture. India has imposed ban of usage on over 25 molecules and
Others 10 9 restriction on usage of 12 molecules. Restricted products include Monocrotophos
Total 100 100 (ban for use on vegetables) and Endosulfan (banned in the state of Kerala). With
diminishing soil fertility due to continuous usage of chemicals, organic farming is

AGROCHEMICALS AND SEEDS 14

 B&K RESEARCH APRIL 2009

gaining popularity in some parts of Punjab, Kerala and Tamil Nadu. Move towards
biopesticides is being contemplated, though on a small scale. Biopesticides form just
1-2% of the agrochemical market. They attract lesser residue-limit checks and are
profusely used for export related fruits and vegetables. Though it is considered almost
as effective as chemical pesticides on fields, the pre-requirement of keeping farms
barren for at least three years before its usage, is proving infeasible. With continuously
increasing exports of horticultural and vegetable products, we may see biopesticides
usage to grow up by 10-15% over the next five years.

Pest incidence

Pesticides sales are driven by pest attack on crops. India’s tropical climate has been a
suitable environmental condition for year-round activity of many pest species. Crops
compete with 80,000 plant diseases, 30,000 weed species, 10,000 insects and 3,000
worms (Source: TNAU).

Recent pest incidences in India

Apart from various regular pests like pink bollworm, whitefly, termite, stem borer,
mites, etc, incidence of mealy bug has added to the consumption of pesticide in FY08.
Major cotton growing states like Punjab, Haryana, Rajasthan, Maharashtra and Gujarat
faced serious infestation of mealy bug. Attack of this pest has helped in increasing
pesticide sales in FY08 in the country. The precautionary measures taken up by state
agencies helped bring down the impact of mealy bug in FY09. However, the pest
infestation continued to persist in some parts of North India. Other pest incidence in
FY09 include Caterpillar attack on soya bean in Maharashtra, Spodoptera Litura
infestation on cotton in Andhra Pradesh, downy mildew attack on maize crops in
Tamil Nadu, White Backed Plant Hopper and Neck Blast incidence in paddy in Haryana,
etc. In India less than 25% of the cropped area is treated with agrochemicals
Crop and pest profile
Crop Normal pests and diseases Major active ingredients used

Cotton Bollworms, spodoptera, whitefly, grey mildew, mealy bug Cypermethrin, endosulfan, acephate, carbendazim, chlorpyriphos.

Rice Leaf folder, stem borer, brown plant hopper, leaf blight Fipronil, carbofuran, imidaclorpid, carbendazim, buprofezin.

Wheat Rust, karnal bunt, black point, loose smut, foliar blights, Imidaclorpid, tebuconazole, endosulfan, propiconazole,
brown wheat mite, powdery mildew chlorpyriphos, fipronil.

Sugarcane Early shoot borer, top borer, pyrilla, black bug, whitefly Endosulfan, monocrotophos, malathion.

Sunflower Bud necrosis, hairy caterpillar, ear head pests, downy Monocrotophos, metalaxyl, mancozeb, carbendazim, dimethoate.
mildew, leaf hopper, whitefly, spodoptera litura

Vegetables Sucking pests (spider mites, white flies), Shoot & Fruit borer, Imidaclorpid, tebuconazole, endosulfan,
tobacco caterpillar, web worm, aternaria

AGROCHEMICALS AND SEEDS 15

B&K RESEARCH APRIL 2009

Mealy bug infected cotton plant Brown plant hopper in rice crop

Wheat rust, Ug99 – devastating rust spreading fast, in India by 2010-11?

The disease, Ug99, is a virulent strain of black stem rust fungus, discovered in Uganda in
1999. The strain has then quickly spread to the other neighboring wheat growing regions
like Kenya, Ethiopia, Yemen and north into Sudan. By 2007, it has crossed Red Sea to
reach Iran. Black stem rust is common blight on wheat. In 1954, the virus infected wheat
fields in North America and affected 40% of the wheat crop in the region.

FAO in 2008 has warned about this wheat killing fungus attack in India. If the fungus
incidence occurs in India, it will be a substantial opportunity for companies with strong
presence in fungicide segment like Bayer, Rallis and United Phosphorus. This stem rust’s
spores spread through travelling by wind across continents. Based on the wind patterns,
Ug99 could reach the northern Middle East, Afghanistan, Pakistan and then to India.
Indian government agriculture agencies are aware of the same and are working towards
protecting the crop, as wheat is accorded top priority in Indian R&D programmes, as it
directly impacts the nation’s food security. ICAR has identified 12 wheat varieties
cultivated in India has resistance to Ug99 and its variants.
Possible migration routes of wheat rust Ug99

AGROCHEMICALS AND SEEDS 16

 B&K RESEARCH APRIL 2009

Competitive landscape of major products

Active ingredient Key players (Brand)

Hexaconazole Meghmani Organics (Control), Nagarjuna Agrochem, Excel (Hexzole), Indofil (Sitara), Rallis (Contaf).

Acephate United Phosphorus (Lancer), Cheminova (Acifete), Bayer (Tarneron Gole), Dow (Orthene), Dhanuka (Dhanraj),
Syngenta (Tremor), Rallis (Asataf).

Buprofezin Rallis (Applaud), Dupont (Jawa), Syngenta (Cyclone), Crystal Phosphate (Tribune), Coromandel Fertilizer (Ninja).

Monochrotophos Chambal Fertilisers (Monovir ), Rallis (Tata Mono), Nagarjuna Agrochemicals (Monochrovin), Cheminova (Luphos),
Coromandel Fertilizer (Parryphos).

Dimethoate Ishagro (Rogor), Nagarjuna Agrochemicals (Teeka), Anu Chemicals (Anurogar), Ramcides (Robgor), Chemicides
India (Primogor), Rallis (Rogor).

Imidachloprid Bayer (Confidor), United Phosphorus (Imidagold), Coromandel Fertilizer (Parrymida), Rallis (Tatamida).

Indoxacarb Dupont (Avaunt), United Phosphorus (Fego), Gharda (Kingboxa), Rallis (Daksh).

Atrazine Pesticide India (Solaro), Zuari (Atrasaan), Nagarjuna Agrochemicals (Surya), Dhanuka (Dhanusine), Rallis (Atrataf).

Pretilachlor Meghmani, Nagarjuna Agrochemicals, Excel (Hexzole), Indofil (Sitara), Rallis (Preet).

Captan Coromandel Fertilizer (Hexcap), Dhanuka (Dhanutan), Coromandal Indag (Deltan), Rallis (Captaf).

AGROCHEMICALS AND SEEDS 17

 B&K RESEARCH APRIL 2009

The Indian seeds market

The Indian seeds market is worth over Rs 50 bn. Although Indian seed market is the
fifth largest in the world, it is almost exclusively supplied by locally produced seeds.
Farmers retain the seeds of food crops like wheat, rice, sorghum, millet and pulses for
many years, and the largest volumes in the seed trade happens in self-pollinating
varieties (rice, wheat, etc). The overall seed replacement (SRR) is very low, with the
exception of cotton, maize, sunflower and few vegetables. The increasing awareness
and the desire to improve the yields are fostering growth in the sector.

Indian seeds market

Types Market size Growth Major players
(Rs bn) (%)

Hybrids Rs 27 bn 15-20 Nuziveedu Seeds, Rasi Seeds, Bayer

CropScience, Mahyco, Monsanto, Advanta
India, Kaveri Seeds and other private players

Vegetable and Rs 10 bn 15-20 Syngenta, Golden Seeds, Nunhems, Namdhari

Fruit seeds Seeds, Seminis, Advanta India, etc.

Conventional Rs 13 bn 8 State agricultural corporations

Source: Industry

Seed market segments

In India, hybridisation is relatively high in the crops like cotton, maize, and sunflower.
Other crops like bajra (pearl millet) and jowar (sorghum) are also witnessing
improvement in the acreage under hybrid seeds. Key crops like wheat and rice (paddy)
have less than 1% of the total acreage under hybrid seed varieties.
Hybrid seed market Hybrid seeds market (FY08)
60 6%
9%
50
6%
40
Rs bn

5% 50%
30
20 4%

10
20%
0
FY07 FY08 FY09 FY13 Cotton Maize
Hybrid Paddy Jowar
Bajra Sunflower
Cotton Maize Hybrid Paddy Jowar Bajra Sunflower Others Others

Source: Industry

AGROCHEMICALS AND SEEDS 18

 B&K RESEARCH APRIL 2009

Cotton constitutes 50% of the hybrid seed market. The improvement in the yields
with use of Bt cotton seeds and increase in the number of Bt cotton seed varieties
available in the market have helped increase the acreage under Bt cotton seeds. Other
crops like maize, sunflower, bajra are also witnessing improvement in the acreage
under hybrid seed varieties. The next big opportunity within the seed industry is the
rice and wheat segment, were the hybridisation is less than 1% of the total crop
acreage. Hybrid rice seed market is expected to grow from Rs 1.2 bn in FY08 to Rs 9.2
bn by FY13.
Hybrid seed market landscape
Crop Normal acreage Hybridisation Market leader Other players
(mn ha) status (%)

Corn 6.4 40 Monsanto Pioneer, Syngenta, Kaveri, Advanta

Sunflower 0.7 70 Syngenta Advanta, Kaveri, Devgen, Gangakaveri,

Cotton 8.4 85 Nuziveedu Seeds Rasi, Mahyco, Thulsi, Advanta, Kaveri

Rice 39.1 <2 Bayer BioScience Pioneer, Advanta, Nuziveedu, Kaveri

Wheat 28.2 <1 - -

Bajra /Pearl Millet 9.2 75 - -

Jowar/Sorghum 4.2 40 - -
Source: Industry
Seed industry

Indian seed industry

Public sector Private sector

National Seeds State Farms State Seed Indian private MNC seed
Corporation - 2 Corporation of Corporation - 14 seed companies - companies - >10
India >200

Source: B&K Research

Indian seed industry includes both public sector companies and private sector
enterprises. There are 14 State Seed Corporations and two National Seeds
Corporation. Private players have begun to play a significant role with the introduction
of hybrid and GM seeds. Government agencies has dominant market share in the self
pollinating crops, while private players are leaders in the hybrid and GM seeds. In
India, more than 80% of the farmers rely on farm saved seeds leading to a low seed
replacement rate. Seed replacement rate in India is less than 16%.

AGROCHEMICALS AND SEEDS 19

 B&K RESEARCH APRIL 2009

Indian seeds market Indian commercial seeds market

Commercial
Seeds 15%

Organis ed
Private 50%
Public
60%
40% Unorganis ed
50%

Saved Seeds
85%

Source: Industry
The seeds business model is a low cost model with total material and labour costs
forming 40-50% of sales. A strong germplasm collection is the key cornerstone of a
successful seed company. Following is the business model of a typical seed company.

1. Germplasm/Germbank

2. Research

3. In-house field trials by company breeder

4. Seed multiplication by contract farmer

5. Test marketing

6. Commercialisation

Seeds development model

Germplasm Product Initial hybrid trials

Trials on Test Commercial Ramp up volumes
(traits) design by (2,000-3,000 crosses)
farmers fields marketing launch through geographical
Collection selection of Advanced hybrid Trial
expansion
in-bred lines (200-300 crosses)

ongoing 1-2 years 1-2 years 1-2 years ongoing ongoing

3-6 years

Source: Industry

AGROCHEMICALS AND SEEDS 20

B&K RESEARCH APRIL 2009

Seed Production Chain

A & B or F * M

Single Plant Selection

Nucleus Seed

Company
Breeders Seed breeder
(in-house)

Foundation Seed

Commercial Seed Contract farmer

Source: Industry

Sector dynamics
Bt in cotton

The total market size of Bt cotton is expected to be over 27 mn packets of 450 gm

each in FY09. The Bt cotton seed market is expected to be worth over Rs 18 bn by
FY09 (versus Rs 11 bn in FY07).

Bt cotton seeds adoption in India has seen rapid growth with the increasing awareness
and better yield. Acreage under Bt cotton seed has increased from 44,500 ha in 2002-
03 to 3.8 mn ha in 2006-07. Better output prices and higher income levels in cotton is
luring farmers towards Bt Cotton. India’s cotton acreage has remained between 8-9
mn ha per year. The government, to incentivise cotton cultivation in India, has
increased the minimum support price for cotton from Rs 1,800 in 2007-08 to Rs
2,500 for the year 2008-09 (increase of 39% YoY). Cotton productivity in the country
has increased from 302 kg/ha in 2002-03 to 580 kg/ha in 2007-08. India is the
second largest producer of cotton, next to China. Still, with over 30% of the world
cotton acreage, India contributes only 20% of the world cotton production. Cotton
yield in India stood at 580 kg/ha versus world average of 790 kg/ha, indicating the
scope for improvement in the cotton productivity. Seed companies to capitalise on the
opportunity are trying to popularise transgenic cotton seeds. Besides BG-1, BG-2
varieties have also been introduced in India.

Coupled with rising prices, growing demand for Indian cotton, and shift in acreage in
the US from crops like cotton (acreage has fallen by 26%) and wheat to corn would
further boost cotton acreage in India in the coming years. However, the increasing
hybridisation in cotton (~80%) and control of Bt cotton seed prices by the government
(especially in the states of Gujarat (Rs 550), Maharashtra (Rs 650) and Andhra Pradesh
(Rs 750)), have been diminishing the prospects of a double digit growth in the cotton
market beyond FY10.

AGROCHEMICALS AND SEEDS 21

 B&K RESEARCH APRIL 2009

Increase in adoption of Bt cotton in India … … helped improve cotton yield and production…
25 100 28 500

mn bales (170 kgs each)

20 80 24
400
mn acres

15 60 20
300

kg/hec
%
16
10 40
12 200
5 20
8
0 0 100
4

2008-09E
2002-03

2003-04

2004-05

2005-06

2006-07

2007-08
0 0

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08
Total cotton acreage
Bt cotton acreage Cotton production
Bt cotton as % of cotton acreage Overall cotton yield

Source: Industry, MoA

…still yield is one of the lowest in the world. Bt cotton seed market share
1,400 26% 25%
1,200
cotton yield (kg/hec)

1,000

800 3%
4%
600
9% 18%
400
15%
200
Nuziveedu Ras i
0 Mahyco Tuls i
JK Agri (Event-1) Nath (GFM event)
China Us a World Pakis tan India Others

Source: Mahyco, MoA

Hybrid rice - need for slender fine to spur growth

Most rice hybrids in India are based on the Chinese technology which delivers a sticky
variety of cooked rice unlike the slender fine varieties consumed by an average Indian
household. Research on hybrid rice development started in 1964 in China and in
1972 in India. India is the second largest country after China to exploit hybrid rice
technology on a commercial scale. However, the productivity of the available hybrid
rice varieties in India is 3 t/ha versus 6.2 t/ha in China, indicating the scope for
improving the performance of the available rice hybrid.

AGROCHEMICALS AND SEEDS 22

 B&K RESEARCH APRIL 2009

Hybrid rice seed sales in India Area under hybrid rice in India
36 1,000 2.5

30 800 2

24 600 1.5

'000 hec

%
'000 tn

18 400 1

12 200 0.5

6 0 0
2003-04 2004-05 2005-06 2006-07
0
Area (LHS) % of total acreage
2004 2008 2010E

Source: Industry

Industry players like Bayer Biosciences, Pioneer Advanta, and Kaveri are expecting a
Hybrid seed sales by volume
breakthrough in research for the required hybrid variety by FY11. However, there has been
good growth in demand for the available hybrids especially in the states of Uttar Pradesh,
19% Haryana, Bihar, Chhattisgarh, etc which are driving the sales of hybrid rice seeds in India
presently. Area under hybrid rice in Haryana is ~8% of the total area under rice cultivation,
36%
3% highest among Indian states. In states like Jharkhand and Uttar Pradesh it is over 5%. But in
3% other key states, which have significant acreage under rice cultivation, like Andhra Pradesh,
3% Tamil Nadu, Assam, etc the hybridisation levels are very low (below 0.2%). 85% of the total
acreage under hybrid rice is concentrated in top five states viz. Uttar Pradesh, Haryana,
16% 4%
Chhattisgarh, Jharkhand and Bihar. Total number of rice hybrids released in India is 29, 23
15% through public sector and 6 private sector hybrids. Out of this, five hybrids viz., DRRH -1,
Uttar Prades h Chattis garh KRH-2, Sahyadri, PHB-71 and PA 6201 are under large scale seed production. Area under
Punjab/Haryana Bihar/Jharkhand hybrid rice is ~ 1 mn ha (<2% of the total rice acreage in India). Area under hybrid rice will
Gujarat Andhra Prades h increase after heterotic hybrids, suitable for high productivity areas of Punjab, Haryana,
Karnataka Wes t Bengal coastal region of Andhra Pradesh and shallow lowland areas are developed and an effective
Tamil Nadu Others transfer of technology program is taken up in these target states. With a good possibility of
acceptable hybrids in India in the near term and GM rice in future, significant growth is seen
Source: Industry
(of more than 50%) in the rice seed market in the future.
Rice productivity Rice cultivation in India
8 2.5 120
7 2.0 100
6 80
Yield (tn/hec)

1.5
5 60
1.0
4 40
0.5 20
3
2 0.0 0
1950-51
1955-56
1960-61
1965-66
1970-71
1975-76
1980-81
1985-86
1990-91
1995-96
2000-01
2005-06
2007-08

1
0
India

World avg

China
Myanmar

Vietnam

Japan
U.S.A.
Thailand

Brazil

Indonesia
Pakistan

Bangladesh
Philippines

yield (tn/hec)
Area - mn hec(RHS)
Production - mn tn (RHS)

Source: MoA

AGROCHEMICALS AND SEEDS 23

 B&K RESEARCH APRIL 2009

Indian hybrid rice market is worth over Rs 1.6 bn, with a market size of ~18,000 t in
FY08. Bayer BioScience is the market leader with ~59% market share in volume. Pioneer
and Advanta have garnered 23% and 17%, respectively. Rice, being the next big growth
driver within the seed industry, all the companies including Nuziveedu Seeds, Kaveri
Seeds, Rasi Seeds, etc are making investments to develop there own hybrid varieties.

Stable acreage of corn

The hybrid corn seed market, worth over Rs 5.5 bn, in India has been dominated mainly
by Monsanto, Pioneer, Syngenta and Kaveri. The wide uses of corn as feed in poultry,
feedstock in starch manufacturing, breweries, food in some parts of India and medicines
is generating huge demand for the crop. The acreage for corn has been ~7.5 mn ha since
2003-04. In kharif season of 2008, the acreage under corn remained at 7.1 mn ha. With
only 40-50% of the total crop area under hybrid seed, corn segment presents exciting
opportunities for seed companies in the Indian seed market. Adoption of hybrid corn seed
is better in the non-traditional corn growing regions in South India, where it is majorly a
commercial cultivation, compared to traditional areas in the north, where it is still a staple
food. Further, low yield of 2.3 t/ha in India versus world average yield of 4.9 t/ha
indicates immense scope for improving the productivity in India. This yield gap between
India versus other developing and developed countries can be met with improvement in
farm practices, increase in hybridisation, and adoption of GM corn seeds will help India fill
the gap between the domestic and international yields. Stem borer and glyphosate resistant
corn is yet to be the introduced in India. With farmers getting higher prices for their corn
output, corn seed segment is expected to witness a growth of 15-20%.

Corn cultivation in India Corn consumption share in India

2,500 25 1%
11%
2,000 20 29%
1,500 15
1,000 10
500 5
0 0
11% 48%
2007-08*
1969-70

1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

2005-06

2006-07

Poultry feed Brewery

Yield (kg/hec) (LHS) Production (mn tn) Human cons umption Starch
Area (mn hec) Animal feed

Source: MoA

AGROCHEMICALS AND SEEDS 24

B&K RESEARCH APRIL 2009

Pest pressure in sunflower

The sunflower market (Rs 1,000 mn) in India has been degrowing due to the occurrence
of diseases. Yields in India have been at 6% as compared to US, China and Brazil where
average yields have been 17%. The acreage for sunflower has fallen by 22% in Kharif
2007 due to the growing shift to corn. With almost 80% of the market already hybrid,
the opportunity for growth is less in sunflower unless innovative hybrids are introduced.

Key crop seeds market profile

Crop Crop Crop area (mn ha) Seed market Hybridisation

season Normal 2007 2008 value (Rs bn) status (%)

Kharif 39.1 37.4 39.4

Rice 1.3 <2
Rabi 3.7 4.4 4.6

Kharif 6.4 7.1 7.4

Corn 5.5 50
Rabi 0.8 1.1 1.2

Kharif 0.8 0.7 0.8

Sunflower 2.5 70
Rabi 1.3 1.1 1.2

Cotton Kharif 8.4 9.2 9.4 16.5 100

Bajra/pearl millet Kharif 9.2 8.3 9.5 1.6 85

Kharif 4.2 3.5 3.6

Jowar/sorghum 1 40
Rabi 4.9 4.5 4.9
Source: MoA, Industry

AGROCHEMICALS AND SEEDS 25

 B&K RESEARCH APRIL 2009

Agriculture biotechnology – next big growth opportunity for the

seed industry
GM or transgenic crops

Farmers and plant breeders have been changing the genetic makeup of crops in order
to improve characteristics like size, resistance to disease and taste, for hundreds of
years now. This started with sowing of only those seeds that came from plants with
desirable traits. Later, the knowledge about plant reproduction helped in development
of crossbreeding of plants in order to create new crops. Now, with the advancement
of biotechnology the genetic makeup of organisms are altered to produce unique
traits as desired. These products are referred to as transgenic, bioengineered, or
genetically modified because they contain foreign genetic material.
Comparing conventional breeding and genetic engineering
Wild Relative Crop Plant Wild Relative Crop Plant

Conventional Breeding Genetic Engineering

The dots represent genes, with green representing the gene of interest

Source: ISAAA

Conventional breeding versus genetic engineering

Conventional breeding Genetic engineering

• Limited to exchanges between the same or very closely • Allows the direct transfer of one or just a few genes, between either
related species closely or distantly related organisms

• Little or no guarantee of any particular gene combination • Crop improvement can be achieved in a shorter time compared to
from the million of crosses generated conventional breeding

• Undesirable genes can be transferred along with desirable • Allows plants to be modified by removing or switching off particular
genes genes

• Takes a long time to achieve desired results

Source: ISAAA

AGROCHEMICALS AND SEEDS 26

 B&K RESEARCH APRIL 2009

Global GM crop scenario

Transgenic crops are commercially made available since 1996. GM crop has seen a
rapid growth in the adoption, global area under GM crops increased from 1.7 mn ha
in 1996 to 114.3 mn ha in 2007. The market value of biotech seeds was $ 7.3 bn in
2007 (expected to be $7.5 bn in 2008). Biotech seeds market has been witnessing a
CAGR of over 15% since commercialisation. Globally Monsanto is the market leader
in GM seeds sales and research. Monsanto’s traits account for over 75% of the global
biotech acreage. Other companies in the GM seeds segment include DuPont, Bayer,
Syngenta, Dow, BASF, etc.

World GM seeds market opportunity Biotech crop acreage in 2007

140 8,000
Biotech crop mn ha % Biotech acreage

120 7,000 Herbicide tolerant Soybean 58.6 51

100 6,000 Stacked traits Maize 18.8 17

Bt Cotton 10.8 9
mn hec

80 5,000
$ mn

Bt Maize 9.3 8
60 4,000
Herbicide tolerant Maize 7 6
40 3,000
Herbicide tolerant Canola 5.5 5
20 2,000
Stacked traits Cotton 3.2 3
0 1,000
Herbicide tolerant Cotton 1.1 1
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Herbicide tolerant Alfalfa <0.1 <1

Acreage (LHS)
Others <0.1 <1
GM s eeds market s ize ($ mn)
Total 114.3 100
Source: Clive James, Phillips McDougall

GM crop adoption in India

Transgenic crop (Bt cotton) is commercially available in India since 2002. GM crops
have been a controversial subject in India, more than three public interest litigations
has been filed with since 2002. In India, the first application for commercialisation of
a GM crop was accepted in 1996, but it was only eight years later in 2002 that the first
GM crop, Bt cotton, was introduced. Bt cotton, the only approved GM crop, has seen
rapid growth in adoption since commercialisation, total area planted with Bt cotton
has increased from 70,000 acres in 2003 to 17.2 mn ha in 2008. Now, more than 80%
of the cotton acreage in India is under Bt cotton seeds.

AGROCHEMICALS AND SEEDS 27

B&K RESEARCH APRIL 2009

A short history of Indian apex court judgments on litigations pertaining to

GM crop:

September 2006 – Supreme Court bans commercial release of GM food crops

and approval of fresh field trials.

October 2006 – Supreme Court makes an exception to its ban order and allows
field trials of GM mustard crops on the request of the developer, subject to biosafety
norms.

May 2007 – Supreme Court further modifies the ban order and allows field trials
of GM crops approved by genetic engineering approval committee till September
2006, subject to new biosafety norms.

February 2008 – Supreme Court vacates the ban order and allowed the GEAC
to approve new GM crops and events for field trails with proper guidelines and
biosafety norms.

April 2008 – Supreme Court directs GEAC to make available all data concerning
allergenicity and toxicity of GM crops under trial on its website.

Companies investing in GM research and seeds development

GM research in India is done by over 22 public sector organisations and over 15

private enterprises. The private enterprises include Monsanto India, Bayer BioScience,
Mahyco, Rasi Seeds, etc. Advanta India also has presence in GM seeds development
in countries other than India and it is in the process of setting up a biotech research
lab in Hyderabad, India. Advanta has also tied up with other research institutions, like
Arcadia Biosciences for development of nitrogen use efficient sorghum seeds.
Monsanto India, with support from the parent company, is developing herbicide tolerant
maize seeds, which is expected to be commercialised by 2002. Other privately held
companies investing in GM research include Sungro Seeds, Mahyco, Krishidhan
Seeds, Nunhems, Nirmal Seeds, etc.

GM crop pipeline in India

The various crops with different genes-traits combinations are under the various
stages of developments in India which include rice, mustard, corn, brinjal, potato,
okra, etc. Despite various hurdles such as court litigations, protests by NGOs, etc
agriculture biotechnology is able to achieve slow and steady growth in India.

AGROCHEMICALS AND SEEDS 28

B&K RESEARCH APRIL 2009

Biotech crops under regulatory process in India

Crop Organisation Stage in development

Brinjal Mahyco, Mumbai Seed production

Indian Agricultural Research Institute, New Delhi
Sungrow Seeds Ltd., New Delhi
Tamil Nadu Agriculture University, Coimbatore

Banana Indian Council for Agriculture Research Laboratory stage

Indian Agricultural Research Institute, New Delhi

Cabbage Nunhems India Pvt Ltd Confined trials

Sungrow Seeds Ltd, New Delhi
Mahyco, Mumbai

Cauliflower Sungrow Seeds Ltd, New Delhi Multi location trials

Nunhems India Pvt Ltd
Mahyco, Mumbai

Castor Directorate of Oilseeds Research, Hyderabad Confined trials

Chickpea ICRISAT, Hyderabad Confined trials

Corn Monsanto India Ltd, Mumbai Multi location trials

Groundnut ICRISAT, Hyderabad Multi location trials

Mustard Indian Agricultural Research Institute, New Delhi Multi location trials
The Energy and Resources Institute, New Delhi
University of New Delhi, South Campus

Okra Mahyco, Mumbai Multi location trials

Sungrow Seeds Ltd, New Delhi

Potato Central Potato Research Institute, Shimla Multi location trials

Rice Indian Agricultural Research Institute, New Delhi Multi location trials
Mahyco, Mumbai
Tamil Nadu Agriculture University, Coimbatore
Directorate of Rice Research, Hyderabad
M S Swaminathan Research Foundation, Chennai

Tomato Indian Agricultural Research Institute, New Delhi Multi location trials
Mahyco, Mumbai

Cotton Mahyco-Monsanto Biotech Ltd, Mumbai Multi location trials

AGROCHEMICALS AND SEEDS 29

B&K RESEARCH APRIL 2009

Bt brinjal – first GM vegetable

Bt brinjal is expected to be the second GM crop to be launched in India. After completing

most of the regulatory requirements, Bt brinjal will be launched commercially when
GEAC approves the commercialisation. India is the second largest producer of brinjal
with over 26% world production share and it’s grown in more than 550,000 ha. During
the trails, Bt brinjal was found to be effective against Fruit and Shoot Borer, key pest in
the brinjal crop. Bt brinjal is expected to benefit through increase (116%) in yields and
reduction (42%) in pesticide sprays over open-pollinated varieties.

Significance of Bt brinjal

The significance of the launch and performance of Bt brinjal emanates from the
expectation about the launch of other crops in the pipeline. The successful completion
of regulatory procedures and commercial success of Bt brinjal, the first GM food
crop, will be the key to accelerate the research and investments in agriculture biotech
sector, from both public sector and private enterprises.
Development and regulation of Bt brinjal in India

2000: Transformation and greenhouse breeding for integration of

cry1Ac gene into Bt brinjal hybrids

2001-02: Preliminary greenhouse evaluation to study growth,

development and efficacy of Bt brinjal

2002-04: Confined field trials to study pollen flow and growth, aggressiveness and
weediness, biochemical properties, toxicity, allergenicity of Bt brinjal hybrids
2004-05: Data on the effect of Bt brinjal on soil microflora efficacy against FSB, pollen
flow & chemical composition submitted to the review committee of genetic manipulation
(RCGM)

2006-07: Submission of biosafety, environmental safety, gene efficacy & agronomic

performance data to the GEAC. GEAC posted a biosafety dossier on its website showing
results of studies conducted between 2001 and 2007.

2007-09: GEAC approved seven Bt brinjal

hybrids for large scale field trails (LSTs) 2008-09: GEAC approved the
experimental seed production of seven
Indian Institute of Vegetable Research
Bt brinjal hybrids on 0.1 acre per hybrid
(IIVR) of ICAR is currently conducting the
LSTs

Under consideration for commercial release

Source: Ministry of Environment & Forests

AGROCHEMICALS AND SEEDS 30

 B&K RESEARCH APRIL 2009

Regulation of GM crops in India

The concerns expressed about the potential impact and risks associated with the GM
crops has prompted the government establish biosafety legislation and regulatory
institutions in India, like in many other countries. Department of biotechnology and
ministry of environment and forest are responsible for implementation of policies
and procedures pertaining to biotech crops in India. These two agencies along with
six other competent authorities are responsible for providing approval for research
and commercialisation of transgenic crops in India. Regulatory framework for biotech
crops in India consists of the following rules and guidelines:
Rules and guidelines under regulatory framework for biotech crops in India
Rules and guidelines Scope

Rules 1989 under Environment Protection Act 1986 Order compliance of the safeguards through regulatory
approach under the EPA
Rules & Policies
Seed Policy 2002 Import, registration, marketing and evaluation of seeds
performance

Recombinant DNA guidelines, 1990 Employs the concept of physical and biological containment
and the principle of good laboratory practices.
Guidelines
Guidelines for research in transgenic crops, 1998 Guidelines for carrying out research in transgenic plants
including toxicity and allergenicity of transgenic seeds, plants
and plant parts.

Procedures involved in the approval of GM crops in India

Laboratory stage Applicant

Institutional Biosafety Committee (IBSC): Notes, approves,

Green house trails recommends to seek approval of RCGM

Committee (RCGM): Notes, Monitoring & Evaluation Committee (MEC):

Confined trails approves, recommends Visits trail site, analyze data, inspect facilities,
generation of appropriate and recommend safe and agronomically viable
biosafety & agronomic data transgenics to RCGM/GEAC

Multi location trails

Genetic Engineering Approval Committee ‘India Council of Agriculture
(GEAC): Approves for large scale use, open Research’ conducts trails to
release in to environment. Informs decision to generate complete agronomic data
Large scale trails Ministry of Agriculture and informs applicant & recommends for commercial
to follow the relevant act & rules. release of GM crops

Seed production Seeds Act/Rules Release for commercial agriculture

Source: Department of Biotechnology, India

AGROCHEMICALS AND SEEDS 31

 B&K RESEARCH APRIL 2009

Other developments
Government initiatives to drive agriculture sector growth
Indian agriculture sector, provides the food security for the world’s second most
populous country, is the mainstay of the Indian economy. The government is taking
focused initiatives to improve the growth of agriculture sector to 4% during the
eleventh plan period (2007-12), versus 2.5% growth during the tenth plan period
(2002-07). Initiatives such as National Agriculture Development Programme (NADP/
RKVY), National Food Security Mission (NFSM), National Horticulture Mission
(NHM), National Rural Employment Guarantee Scheme (NREGA), Farm Loan Waiver
and intensification of efforts through Watershed Programmes, Bharat Nirman and
BRGF in the rural sector present new opportunities for leveraging (agricultural) growth.
Various government support programmes
Scheme Budgeted amount Focus Opportunity for agriculture
Bharat Nirman Rs 1.7 trn between 2005-2009 Irrigation development: Creation of Higher productivity
10 mn ha irrigation potential.
Rural road Agriculture produce marketing
Telephone connectivity: In 66,822 Strengthens farm extension, pest
unconnected villages surveillance, and marketing.
Rural electrification: Grid based Selective ground water based irrigation
electrification of 125,000 villages
Natioanl Agriculture Rs 58.8 bn between 2008-2012 Development of food crops, Encourages investment at State level
Development Programme mechanization, productivity and for overall development of agriculture
(NADP/RKVY) encourages convergence of
other schemes
National Food Security Rs 48.8 bn between 2008-2012 Aims to increase annual food grain Improves agriculture practices and
Mission (NFSM) production by 20 mn tn by 2011-12. productivity
National Agriculture Rs 10 bn Targeted spending towards Improved seeds varieties and
Innovation Project strengthening the agriculture agriculture practices
research systems. World bank
funding of US $ 200 mn
National Rural No fixed allocation. Generates rural employment. Water Higher productivity, agriculture
Employment Guarantee ~Rs 300 bn spent between conservation, irrigation, land produce marketing, land development,
Scheme (NREGA) 2006-2008 development, infrastructure reduces labor migration, etc.
development, etc. are the
works prioritised
Integrated Watershed Rs 18.3 bn for 2008-2009 Development of water resources Higher productivity
Management Programme
Backward Region Filling critical gaps in infrastructure, Provides appropriate input and
Grant Fund (BRGF) capacity building in agriculture extension services. Strengthens extension
workers, barefoot technicians, etc. services, repair of pump sets and
agriculture machinery, etc.
Sampoorna Grameen Rs 19.3 bn for 2008-2009 Self help group (SHG) activities in Training SHGs for providing extension,
Rozgar Yojana (SGSY) clusters to reduce poverty. credit, marketing services to farmers

AGROCHEMICALS AND SEEDS 32

B&K RESEARCH APRIL 2009

National Food Security Mission

NFSM was launched in FY08 to improve the production of rice by 10 mn tonnes,

wheat by 8 mn tonnes and pulses by 2 mn tonnes by the end of the eleventh plan
period. Key strategy was to make focused interventions to raise farm production by
identifying districts with scope for improving productivity of major food grain crops.
The government has proposed to spend ~Rs 50 bn between 2007-12 under NFSM to
make available quality seeds and fertilisers, credit and extension support in about 300
identified districts. In 2008, NFSM has yielded satisfactory results in the first year of
its implementation. NFSM encourages usage of hybrid seeds and quality pesticides to
improve the productivity of food grains.
NFSM proposed funding
14.0

12.0

10.0

8.0
Rs bn

6.0

4.0

2.0

0.0
FY08 FY09 FY10 FY11 FY12

Source: GoI

National Agriculture Development Programme

NADP aims to incentivise the States to increase the share of investment in agriculture and
complement the agriculture growth target of 4%. The scheme provides flexibility and
autonomy to the States in planning and executing the schemes appropriate to local
requirement. The program demands bottom up proposals, whereby district level agriculture
plans are prepared and then they are integrated to prepare comprehensive State Agriculture
Plan, which then sent for requisite of funds to Central government. The government
proposes to spend over Rs 250 bn during the eleventh plan period and has made a
budgetary allocation of Rs 32 bn in FY09 (versus Rs 15 bn in FY08). With additional funds
coming from States, this will help in improving the investments in agriculture, increases the
production of food grains, other crops and animal products, thereby leading to generation
of assets and contributes to long-term growth of the sector.

Farm Loan Waiver

In 2008, as a one time intervention, government has taken up farm debt waiver and
debt relief worth over Rs. 710 bn. This has helped removing the debt burden of the
~40 mn indebted farmers and also made them eligible for new loans from banks.

AGROCHEMICALS AND SEEDS 33

 B&K RESEARCH APRIL 2009

Institutional credit accounts for ~58% of the agriculture credit, while the balance
financing is from moneylenders, landlords, traders, etc. The institutional credit to
agriculture sector has increased from Rs 696 bn in FY03 to Rs 2,436 bn in FY08.
Fragmented land holding, lack of simultaneity between the realisation of income and the
act of expenditure gives rise to the demand for credit in agriculture sector. According to
NSSO, non-institutional channel account for 42.3% of the debt of farmers. The Expert
Group estimates that in 2003 non-institutional channels accounted for Rs. 48,000 crore
of farmers’ debt out of which Rs. 18,000 crore was availed of at an interest rate of 30
% p.a. With the focus of saving the gullible farmers from non – institutional lenders the
government has been focusing to improve the institutional credit availability through
various initiatives like mandatory 18% of net credit should be to agriculture, subsidised
interest rate of 7% for agriculture credits from banks, issue of Kisan Credit Cards, etc.
These initiatives have helped increase the credit flow to the sector from 17.8% during
the period FY01-04 to 24.5% during the period FY05-08.

Sources of credit for cultivator households Agriculture credit flow

100 3,000 35
2,500 30
80 25
2,000
20
Rs bn

60 1,500

%
15
%

40 1,000
10
500 5
20
0 0
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08
0
1951 1961 1971 1981 1991 2002
Ins itutional Credit
Non-ins titutional Ins titutional Agri credit to agri GDP (%)

Source: NSSO Source: NABARD

Increase in minimum support prices (MSP)

Government agencies are actively involved in procuring paddy, wheat and cotton
crops at prescribed MSP levels, while in the other crops it is not the same case.
However, paddy, wheat, sugarcane and cotton crops represent only 61% of the gross
sown area in India. MSP announced for various other crops including pulses and
maize are not honored as in paddy or wheat. Agriculture pricing policy was started to
reduce the fluctuations in food grain prices, and provide incentive to the producers
three decades back. Now, MSP is viewed as a form of market intervention on the part
of the State as one of the supportive measures to the farmers. Government has in the
past two years has increased the MSP for various crops substantially to improve the
profitability of agriculture by filling the gap between the market price and MSP. This
has increased the price realisations of agriculture produces like paddy, wheat and
cotton for farmers.

AGROCHEMICALS AND SEEDS 34

B&K RESEARCH APRIL 2009

MSP
12,000
Paddy (common)
Coars e cereals
10,000 Wheat

Rs/tn
8,000

6,000

4,000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09
Source: MoA

Other agriculture support measures

Apart from the above mentioned support initiatives, the government also runs various
other measures like Bharat Nirman programme aimed at improving rural infrastructure
like irrigation facilities, roads and telephone connectivity, subsidised price for fertiliser,
grant for agriculture research organisations, funding for agriculture education institutes,
etc. Apart from the centrally sponsored schemes, state level supports like free power
for agriculture in Tamil Nadu, Karnataka, etc. are also in vogue to support agriculture.

Convergence of government schemes required to acheive desired results

Rural development related

Social capital related - Micro irrigation
- NREGA (60% non material) - IWDP
- SGSY (self employment) - Horticulture & bamboo mission
- Literacy mission
- Health mission
- AIBP
NADP
75% for new proposals Sustainable
25% fund for gap filling agriculture
growth

Infrastructure related
- Bharat Nirman
Other major funding sources - Rural electrification
- BRGF - Non-conventional energy
- State finance commission - Rural roads
- Member of parliament local area
development division

Source: B&K Research

AGROCHEMICALS AND SEEDS 35

B&K RESEARCH APRIL 2009

All these support initiatives from government agencies are focused towards improving
the productivity of agriculture in India and thereby improving the profitability for the
farmers. However, the key concerns remains with the poor storage facilities and little
progress in improving the marketing efforts for agriculture produce which is the key
hurdle for the farmer to get better realisations for agriculture produce. Overall, the
government initiatives have improved the agriculture production in India and made
the country self sufficient in its food grains requirements but has a long way to go in
making the agriculture profession remunerative.

Emerging rural retail chains

The key development in the agriculture inputs marketing value chain is the emergence
of corporate retailers in rural India. These new retailers constitute a very small portion
of the total market (less than 5%, as per industry sources). While existing traditional
retailers will continue to play a dominant role in the market place, we expect the
organised retailers, with the ambitious expansion plans and increasing acceptance,
will gain a significant presence in the future. Development of organised retail formats
will benefit the agrochemical and seed industry in preventing the spurious products in
the markets, standard pricing of products across regions, etc. The leading players in
the organised rural retail are ITC (Choupal Sagar) and DCM Shriram (Hariyali Kisaan
Bazar). Other emerging players, including Triveni (Khushali Bazaar) and Godrej
(Adahar), have ambitious expansion plans.
Key retailers in rural India
Retail store Promoter group No. of stores Expansion plans

Kisan Sansar network Tata – –

Hariyali Kisaan Bazar DCM Shriram Consolidated 220 1,000 by 2010

Mana gromor Coramandel Fertilisers 500 by 2009

Adahar Godrej and Future group 22 50 by 2009

Choupal Sagar ITC 24 100 by 2010

Khushali Bazaar Triveni Engineering & Industries 42 200 by 2009

Kisan Seva Kendras IOC 1318 2,500 by 2010

Bayer CropScience has already established tie-ups with players like ITC, DCM Shriram,
Coramandel fertilisers, etc. Bayer is working along with these retailers by providing
supports like training to the employees, POPs, coordinated field visits, etc. The company
has achieved incremental sales of Rs 130 mn during FY08, through this initiative. Other
companies like Rallis India and United Phosphorus also have similar arrangements with
the organised retailers. Seeds companies like Pioneer, Monsanto, Advanta and Syngenta
already have distribution agreement with these emerging retailers. Kaveri Seed is yet to
establish such tie-ups and is looking to achieve some strides in 2009.

AGROCHEMICALS AND SEEDS 36

 B&K RESEARCH APRIL 2009

Tata Kisan Sansar Godrej’s Aadhar Hariyali Kisaan Bazar

Agriculture sector – attracting private equity investments

The abundant growth opportunity within the agriculture inputs sector has seen increase
in the participation from organised private sector enterprises. The companies in the
sector have attracted investments from leading investment firms like Blackstone,
Morgan Stanley, Henderson Equity, etc. Besides general private equity funds, sector
focused funds activity are also likely to increase in the sector. In July 2008, Rabo bank
raised US $100 mn fund focused on investing in food and agriculture value in India.
Yes Bank is also planning an agriculture fund. The scope for improving hybridisation
and prospects in biotechnology (GM) in seed sector and huge generic export
opportunities are the alluring reasons for the recent investments in the sector. Indian
companies require these funding supports to invest in research capabilities and
strengthening the market presence to compete with large multinational firms. The
sector will continue to remain attractive and witness investment flows.
Recent investment transactions in agriculture and food processing sector
Date Company Sector Revenue(Rs mn) Investor Amt (US$ mn)

December 2008 Nuziveedu Seeds Seeds 5,000 Blackstone Group 50

December 2008 Biotor India Castor oil 10,000 Morgan Stanley Private Equity 40

December 2008 Sree Ramcides Crop protection 1,010 ePlanet Venture 5

March 2008 Sharda Worldwide Exports Crop protection - Henderson Equity 22

March 2008 Suminter India Organics Organic farming - Nexus India Capital -

2007 Lakshmi energy & foods Rice 9,545 Bessemer Venture -

March 2007 K S Oils Edible oil 20,410 Baring Private Equity 22

January 2007 Asian Dhall Industries 1,250 SAIF Partners 8

AGROCHEMICALS AND SEEDS 37

 B&K RESEARCH APRIL 2009

INITIATING COVERAGE Monsanto India BUY

Share Data
Focused player, segment leader
Monsanto is the market leader in the Indian hybrid corn and glyphosate market. The
Market Cap. Rs 12 bn (US$ 249.2 mn)
company has divested the non core businesses and has now become a focused player.
Price Rs 1,421 In India, less than 50% of the corn acreage is under hybrid seeds and more than 80%
Target Price Rs 1,846 of the farmers practice manual weeding. Monsanto, with its 13 established hybrid
corn seed varieties and herbicide product (glyphosate) is set to benefit from the
BSE Sensex 10,967
improving agriculture prospects. Further, access to the parent technology will help
Reuters MCHM.BO the company in tapping the GM corn seed opportunity in India.
Bloomberg MCHM IN
Year to March FY08 FY09E FY10E FY11E CAGR (%)
6m avg. daily turnover (US$ mn) 0.06
P&L Data (Rs mn) (FY08-11E)
52-week High/Low 1,859/1,080 Net Sales 3,635 4,337 4,982 5,785 16.7
Issued Shares 8.6 mn Operating Profit 716 979 1,098 1,385 24.6

Valuation Ratios Adjusted Net Profit 635 878 979 1,225 24.5
Margins (%)
Yr to 31 Mar FY09E FY10E
OPM 21.7 23.7 23.0 24.8 –
EPS (Rs) 101.7 113.5
NPM 17.5 20.2 19.7 21.2 –
+/- (%) 38.3 11.6
Balance Sheet Data (Rs mn)
PER (x) 14.0 12.5 Total Assets 5,730 4,726 5,705 6,910 6.4
PBV (x) 3.7 3.0 Shareholders’ Funds 2,661 3,357 4,124 5,097 24.2
Dividend/Yield (%) 1.3 1.5 Per Share Data (Rs)

EV/Sales (x) 2.5 2.0 EPS 73.5 101.7 113.5 142.0 24.5
CEPS 88.3 117.7 130.1 159.3 21.7
EV/EBITDA 10.5 8.7
Dividend 207.0 18.0 21.0 25.0 (50.5)
Shareholding Pattern (%)
Returns (%)
Promoters 72
RoE 19.8 29.2 26.2 26.6 –
MFs 5 RoCE 24.8 34.5 30.9 31.4 –
Public & Others 23
• With strong presence in the hybrid corn and herbicide (glyphosate), Monsanto is
Relative performance set to benefit from improving hybridisation in corn and usage of herbicides.
Monsanto has garnered 39% of the hybrid seed market and glyphosate is the
6,000
leading herbicide in India.
5,000
4,000 • The company is now well positioned to benefit with the sales growth of over
3,000 16.7% CAGR for the period FY08-11E.
2,000
• The company is in the process of obtaining regulatory approval for GM corn in
1,000
India and the product is currently under ‘biosafety research field trail-1’. The
0
product is expected receive approval for commercialisation by 2011.
Jan-04

Mar-05
Oct-05
May-06
Dec-06
Jul-07
Jan-08
Aug-04

Aug-08
Apr-09

• We expect earnings CAGR of 24.5% for the period FY08-11E. At the current
Mons anto India market price of Rs 1,421, the stock trades at 12.5x FY10E and 10.0x FY11E
Limited (Actual) earnings. We initiate coverage with a Buy rating, with the target price of Rs 1,846
Sens ex
(30% upside).

AGROCHEMICALS AND SEEDS 38

 B&K RESEARCH APRIL 2009

Investment arguments
Market leader in hybrid corn market
Increasing hybridisation in Monsanto is leader in the Indian hybrid corn segment with over 39% market share.
corn to benefit Hybridisation in corn is less than <50% of the total corn acreage in India. With the
increase in support prices for corn and improvement in the adoption of hybrid seeds,
the hybridisation is expected to increase. Monsanto’s access to superior germplasms,
breeding tools and investment in R&D, has helped the company develop high yielding
corn hybrid seeds that suits India’s diverse agronomic and environmental conditions.
The company has developed 13 seed variants and markets them under the brand
name “DEKALB”. Monsanto, with its proven hybrid varieties is set to benefit from
increase in the acreage under hybrid corn seeds. Revenues from sale of corn seeds is
expected to witness CAGR of 18% over. FY09-11E.
Corn hybridisation and yield in major countries Monsanto's revenue from seed
120 10 4,000 24
% of total corn acreage

100 8 3,200 16
80
6 2,400 8
tn/hec

Rs mn

60

%
4 1,600 0
40
20 2 800 (8)

0 0 0 (16)
India Mexico Brazil Argentina USA FY06 FY07 FY08 FY09E FY10E FY11E
Hybridis ation Yield Revenue YoY

Source: FAO, Industry Source: Company, B&K Research

Growth in the consumption of herbicides

Increasing shortage and cost Glyphosate is the largest selling herbicide in the world and in India as well. Sale of
of labour driving the herbicides in India constitutes only 21% of the total pesticide consumption as against
demand
60% in the world. With over 90% of the farmers engaged in manual weeding,
penetration of herbicide is very low in India. The current size of the herbicide market
is over 5 mn litres. Monsanto’s ‘Roundup’, with active ingredient of glyphosate, is
market leader and well recognised product among farming fraternity. Increasing
awareness and limited availability of labor is driving the demand for glyphosate in
India. Monsanto’s revenue from sale of agrochemicals is expected to witness 12%
CAGR over FY09-11E.

AGROCHEMICALS AND SEEDS 39

 B&K RESEARCH APRIL 2009

Monsanto's revenue from agrochemical

3,200 28
20
2,400
12

Rs mn
1,600 4

%
(4)
800
(12)
0 (20)
FY06 FY07 FY08 FY09E FY10E FY11E

Revenue YoY

Source: Company, B&K Research

Access to parent technology

Brightens the prospects for Monsanto India, with the backup and access to the parent’s technology, is readying
GM corn itself for introducing GM corn varieties. The parent company has committed that all
the business pertaining to corn will be routed through the listed Indian subsidiary.
Global acreage under GM corn is over 35.2 mn hec, 24% of the total area under corn.
GM corn is under cultivation in over 16 countries, including USA, Philippines, France,
and Germany and is expected to be released in Brazil by 2009. In India, the company
has already received clearance for ‘bio-safety research level-1 field trials under confined
conditions’ from Genetic Engineering Approval Committee (GEAC). After this the
company has to complete level-2 field trials and then large scale trails on farmers’
fields. After obtaining the regulatory approval, Monsanto will be looking to launch the
GM varieties in India. We expect that the company should be able achieve some
strides by 2011. Monsanto, with already established hybrids in the corn segment, will
be a major beneficiary when its GM corn technology gets approval for releasing in
India. Further, the company will also be exploiting the opportunity, with the access to
the parent companies R&D, in corn segment like drought tolerant, nitrogen efficiency,
and high oil corn varieties.

AGROCHEMICALS AND SEEDS 40

 B&K RESEARCH APRIL 2009

Global corn research pipeline of Monsanto Co., USA

Discovery Phase I Phase II Phase III Phase IV

Gene or trait Proof of Early Advanced Pre-launch

identification concept development development

Avg duration of 24 to 48 12 to 24 12 to 24 12 to 24 12 to 36
research (months)

Investment (US$ mn) 2 to 5 5 to 10 10 to 15 15 to 30 20 to 40

Avg. Probability of 5 25 50 75 90 success (%)

Gene Leads Tens of thousands Thousands 10s <5 1

Key activity - High-throughput - Gene optimization - Trait development - Trait integration - Regulatory submission
screening-Model - Crop transformation - Pre-regulatory data - Field testing - Seed bulk-up
crop testing - Large-scale - Regulatory data - Pre-marketing
transformation generation

Crop N/A - YeildGard - Higher yielding corn - SmartStax corn - YieldGard VT PRO
rootworm III - Second generation - Drought tolerant - ExtraxTM corn
- Nitrogen utilization drought tolerant corn corn processing system +
corn Mavera TM high-
- High-oil corn value corn with lysine
Source: Company
Divestment of non-core business
Emerged as a focused player Monsanto, inline with its parent company, has strategically chosen to focus on its two
core businesses of hybrid corn and Roundup herbicide. In the past two years, the
company has divested the rice herbicides, sunflower seeds, and wheat herbicide
businesses. The company mopped up over Rs 680 mn through divesture of businesses,
between FY07-08. The company has now become the market leader in the segments
it operates, hybrid corn and herbicide. Further, the company has distributed part of
the cash it held, through free cash flow and raised through sale of business, as special
dividend to the shareholders. By the end of FY09, the company is expected to have
cash & marketable securities worth over Rs 1,500 mn.

Divested products
Period Business sold Sold to Sale proceeds (Rs mn)

Jan 08 Butachlor & Alachlor Sinochem international 333

Nov 07 Sunflower seeds Devgen 153

Aug 06 Sulfosulfuron Sumitomo chemicals 301

AGROCHEMICALS AND SEEDS 41

 B&K RESEARCH APRIL 2009

Strong balance sheet and positive cash flows

Monsanto is debt free company and has been generating positive operating cash flow.
The company has been profitable since FY99. The amount raised through divestment
of non core businesses has been distributed as special dividends to the shareholders
in FY06 (Rs 110) and FY08 (Rs 180). The company will generate over Rs 3 bn of
operating cash flow during the period FY09-11E.

Return ratios EBITDA and Cash flow

40 2,500
RoCE (%) Operating profit
RoE (%) 2,000 Cas h flow from operations

30
1,500

Rs mn
%

1,000
20
500

10 0
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Source: Company, B&K Research

AGROCHEMICALS AND SEEDS 42

B&K RESEARCH APRIL 2009

Investment concerns
Dependence on single crop
Monsanto India revenue from seed business is completely derived through sale of
corn seeds. The parent company, Monsanto Inc has established few other subsidiaries
through which other crop (cotton) business are carried out. Monsanto India’s focus
remains on corn seeds sale, any change in corn acreage and preference towards corn
hybrid will impact the company’s revenue. Thus lack of diversification in crop remains
a key risk to seeds sale revenue. However, strong corn demand for food and feed,
better realisations for farmers, and less than 40% hybridisation in corn offers sufficient
business opportunity for the company within the corn segment.

Other Monsanto group companies in India

Company Business focus

Monsanto Genetics India Pvt Ltd Cotton Seeds

Seminis Vegetables Seeds (India) Pvt Ltd Vegetable seeds

Mahyco Seeds Ltd All major crop seeds

Volatility in price of key raw materials

MIL imports the raw material (glyphosate IPA salt) required for herbicide (Roundup)
manufacturing from China. Price of glyphosate was highly volatile in 2008, which
witnessed steep increase from $4 to $9 and then again corrected downwards to $4.
Further, the import of the raw material is denominated in USD. Thus the volatility in
the price of raw materials and exchange rate (INR versus USD) will impact the cost of
raw materials for the company.

Regulatory hurdles may delay GM launch

Bt cotton is the only approved GM crop in India, since 2002. With lot of NGO’s
working against the introduction GM seeds in India and lengthy regulatory process,
GM corps is facing delays in commercialisation. Thus any failure in proving biosafety
of the crop or unforeseen litigations might delay the launch of GM corn. However,
we have not factored in any revenue from GM corn seed sale in our estimates. We
believe Monsanto’s experience with Indian and other countries regulatory procedures,
and successful commercial launch of GM corn in other countries will help in clearing
the Indian regulatory hurdles.

AGROCHEMICALS AND SEEDS 43

 B&K RESEARCH APRIL 2009

Valuations
Monsanto India is the leader in the hybrid corn and herbicides segment in India. The
company has divested the non-core business like sunflower seeds, wheat herbicides,
etc inline with its parent company’s strategy. Monsanto’s hybrid corn brand, DEKALB,
and glyphosate brand, ROUNDUP, is popular among Indian farmers. The company
has over 13 hybrid corn varieties and has been introducing new hybrids every year.
With less than 50% hybridisation in corn and over 80% of the farmers practicing
manual weeding, Monsanto has significant growth opportunity in India. We expect
the company will post revenue and earnings CAGR of 16% and 18% for the period
FY08-10E.

Further, Monsanto is developing GM corn varieties for India. GM corn is currently

under field trails and is expected to complete regulatory procedures by 2011. The
GM corn is developed with the trait that enables the crop to develop resistance
against the glyphosate. Commercialisation of GM corn will open up significant growth
avenues in both seeds and herbicides for the company. We initiate coverage with a Buy
rating on the stock, with the target price of Rs 1,846 (13x FY11E)

PER Band EV/EBITDA band

4,000 33.5x 4,500
29.2x
3,500 4,000
28.6x 3,500 24.4x
3,000
23.8x 3,000 19.5x
2,500 2,500
19.0x 14.7x
2,000 2,000
14.2x 1,500 9.9x
1,500
1,000 5.0x
1,000 500 0.2x
500 0
Oct-05

Oct-06

Oct-07

Oct-08

Oct-05

Oct-06

Oct-07

Oct-08
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-05

Apr-06

Apr-07

Apr-08

Source: B&K Research Apr-09

AGROCHEMICALS AND SEEDS 44

B&K RESEARCH APRIL 2009

Business overview
Monsanto India is a 72% subsidiary of Monsanto Co., US. The company is now the
merged entity, which was formed with the merger of three different companies in
2001. It has chemical production unit at Silvassa, hybrid seeds units at Bellary in
Karnataka and Eluru in Andhra Pradesh and a packing unit at Guwahati in Assam.
Monsanto India was incorporated in December 1949 as a private limited Company.
Its status was converted from private limited to public limited in July 1978 and the
company was listed in stock exchanges since 1989.

Seed sale
Monsanto India sells hybrid corn seeds under the brand name “Dekalb”, a century
old seed brand owned by Monsanto Co., USA. Monsanto has over 39% market share
in the branded hybrid corn seed segment in India. The company has been maintaining
its leadership position since 2004. The area under hybrid corn is ~ 4 mn hectares
(50% of the total maize acreage in India). Hybridisation in corn is expected to increase
by over 2-3% every year. The increase in demand for Corn, increasing awareness, rise
in MSP, and seed companies focus on regions under traditional varieties are all set to
drive the hybridization in the corn segment

Corn has been the primary focus of growth for Monsanto worldwide. In India, the
company is driving the growth in this segment by introducing 2 – 3 new hybrid varieties
every year and increasing the brand awareness by working along with farmers,
government agencies, etc. Hybridisation in southern states of India like Andhra Pradesh,
Karnataka and Tamil Nadu is over 80%, while in other key regions of north India it
stood at ~30% only (except Bihar, where the hybridization is above 60%). Monsanto is
now focusing on increasing the sale of hybrid corn seeds in north India. Monsanto’s
revenue from sale of corn seeds is expected to witness 18% CAGR over FY09 – 11E.
Monsanto International – Corn brand performance in 2008
US Brazil Argentina EU27 India

Total corn acreage (mn hec) 35-37 14.7 3.2-4.0 – 8.3

Total hybrid corn acreage (mn hec) 35-37 10-11 3.2-4.0 10-11 2.8-3.0

Average yield (bu /acre) 152 57 120 48 29

Hybridisation (%) 100 75 100 – 42

Biotech corn acreage (%) 80 – 90 – N/A

Monsanto market share (%)

- 2007 23 40 40 12 39

- 2008 25-26 40 45-46 13-14 39-40

- 2009 – Target 27-28 41-42 47-48 15-16 40-42

Source: Monsanto Co., USDA

AGROCHEMICALS AND SEEDS 45

 B&K RESEARCH APRIL 2009

Monsanto’s revenue from seed Hybrid corn seed market landscape

4,000 24 Top 5 players

Revenue
YoY Globally India
3,200 16
Monsanto Monsanto
2,400 8
Rs mn

Pioneer Pioneer

%
1,600 0
Syngenta Syngenta
800 (8)
Bayer CropScience Ganga Kaveri
0 (16) Cargill Advanta India
FY06 FY07 FY08 FY09E FY10E FY11E

Source: Company, B&K Research

Herbicide sale
Roundup herbicide is Monsanto’s systemic, broad-spectrum herbicide and contains
the active ingredient glyphosate. The company’s herbicide formulation facility is at
Silvassa, which was commissioned in 1996. Weeds are wild plants that grow in and
around fields. These weeds compete with crop plants for water, nutrients, and sunlight,
thus impeding the growth of the plant and timely removal these weeds is critical to
improve crop productivity.

Monsanto’s Roundup has high penetration in tea and coffee plantations and grape
orchards. Beginning 2008, the company started targeting new segments including rubber
plantations in Kerala and zero tillage villages in Andhra Pradesh among others. The
company is targeting for a growth of 15% in the herbicide sales in India. Roundup
volumes have almost tripled in the last four years. Current size of glyphosate-based
herbicide in the country is ~5 mn litre. With more than 80% of Indian farmers practicing
manual weeding, there is significant opportunity for growth in herbicide sales. We expect
Monsanto’s revenue from sale of herbicide to witness 12% CAGR over FY09-11E.

Monsanto’s revenue from agrochemical

3,200 28
20
2,400
12
Rs mn

1,600 4
%

(4)
800
(12)
0 (20)
FY06 FY07 FY08 FY09E FY10E FY11E

Revenue YoY

Source: Company, B&K Research

AGROCHEMICALS AND SEEDS 46

 B&K RESEARCH APRIL 2009

Financials
Revenues
Monsanto’s net revenue has declined by 9% between FY05 and FY07, on the back of divesture
of businesses. The company has rebounded to growth trajectory beginning FY08. The growth
in the revenues has come on the back of improvement in realisations and adoption of hybrid
corn and usage of herbicides in recent years. With divestment of all pesticide products other
than glyphosate and improvement in corn seed sales, the company’s revenue contribution
from agrochemicals has fallen from 68% in F03 to 43% in FY08. Going forward, the overall
revenue is expected to post a CAGR of 16.6% for the period FY08-11E.

Revenue Revenue mix

7,000 25 100
6,000 20
15 80
5,000
10 60
4,000
Rs mn

YoY

%
3,000 40
0
2,000 (5)
1,000 20
(10)
0 (15) 0
FY09E

FY10E

FY11E
FY05

FY06

FY07

FY08

FY09E

FY10E

FY11E
FY03

FY04

FY05

FY06

FY07

FY08
Revenue YoY Agrochemicals Seeds

Source: Company, B&K Research

Operating profit
Monsanto after restructuring the product portfolio, inline with its parent company,
again began improving EBITDA from FY08. The company’s exit from the non-core
business impacted the EBITDA profit, which has fallen from Rs 874 mn in FY05 to
Rs 601 mn in FY07. EBITDA growth is witnessing the recovery in growth beginning
FY08. EBITDA is expected to witness 24% CAGR between FY08 and FY11E. EBITDA
margins will remain above 20%, and will remain at ~24.7% in FY11E.

Margins EBITDA
30 1,600 40
1,400 30
1,200 20
25 1,000
10
Rs mn

YoY

800
0
%

600
400 (10)
20
200 (20)
0 (30)
FY09E

FY10E

FY11E
FY05

FY06

FY07

FY08

15
FY05 FY06 FY07 FY08 FY09E FY10E FY11E
EBITDA (%) PBIT (%) PAT (%) EBITDA YoY

Source: Company, B&K Research

AGROCHEMICALS AND SEEDS 47

 B&K RESEARCH APRIL 2009

Net profit
Monsanto’s net profit in the past has been bolstered by the profit from the sale of non
core businesses. Adjusting for the extra-ordinaries, profit declined by 5.4% from
FY06 to FY08. Focus on core business, increase in adoption of hybrid corn and
improvement in realisations will help the company increase adjusted net profit by
24% between FY08 to FY11E.

Net profit
1,400
Net profit Adjus ted net profit
1,200
1,000

800
Rs mn

600

400
200

0
FY05 FY06 FY07 FY08 FY09E FY10E FY11E

Source: Company, B&K Research

Cash flow
Monsanto generated positive operating cash flow for the period FY04 to FY08, barring FY06.
Profit generated through the sale of business and improvement in the cash conversion cycle
has helped improve the operating cash flow. At the end of FY08, the company had cash and
cash equivalents of Rs 2.8 bn. The company distributed ~Rs 2 bn as dividend to the shareholders.
In FY08, the operating cash flow stood at Rs 1,126 mn against net profit of Rs 1,002 mn. This
was because of Rs 459 mn arising out of the sale of sunflower seeds, butachlor and alachlor
businesses. The company’s cash conversion cycle stood at 55 days of the net sales, which is at
the better than the other players in the industry. Going forward, the company’s cash flow from
operations will reach to Rs 1,054 mn in FY10E and Rs 1,291 mn in FY11E.

Cash flow Cash conversion cycle

2,500 90
2,000 80
70
1,500 60
No. of days

1,000 50
Rs mn

40
500
30
0 20
FY09E

FY10E

FY11E
FY05

FY06

FY07

FY08

(500) 10
0
(1,000)
FY09E

FY10E

FY11E
FY05

FY06

FY07

FY08

Operating cas h flow Net profit

Source: Company, B&K Research

AGROCHEMICALS AND SEEDS 48

 B&K RESEARCH APRIL 2009

3Q and 9MFY09 results

(Rs mn) 3QFY08 3QFY09 YoY (%) 9MFY08 9MFY09 YoY (%) FY07 FY08 YoY (%)

Net Sales 660 656 (0.7) 3165 3843 21.4 3092 3635 17.6

EBITDA 110 152 37.5 851 1186 39.4 601 753 25.5

OPM (%) 16.7 23.1 – 26.9 30.9 – 19.4 20.7 –

Other Income 33 35 6.4 109 89 (17.8) 126 170 34.9

Depreciation (31) (33) 5.7 (92) (99) 7.6 (81) (127) 57.1

Interest (1) (1) 66.7 (2) (2) 29.4 (2) (3) 44.4

Extraordinary items 145 0 – 145 0 – 148.5 458.6 –

PBT 256 152 (40.5) 1011 1174 16.1 792 1251 58.1

Tax (76) (29) (62.4) (134) (171) 27 (86) (250) 189.6

PAT 180 124 (31.3) 876 1003 14.5 705 1002 42

EPS 20.8 14.3 (31.3) 101.5 116.2 14.5 82 116 42

Adjusted PAT 96 124 28.3 754 1003 33.1 557 543 (2.5)

Adjusted EPS (Rs) 11.2 14.3 28.3 87.3 116.2 33.1 65 63 (2.5)

AGROCHEMICALS AND SEEDS 49

B&K RESEARCH APRIL 2009

Detailed financials
Income Statement
(Rs mn) FY06 FY07 FY08 FY09E FY10E FY11E

Net Sales 3,308 3,092 3,635 4,337 4,982 5,785

Other operating income 23 40 37 46 53 61

Growth (%) (13) (7) 18 19 15 16

Operating Expenses 2,616 2,531 2,919 3,359 3,884 4,400

% to net sales 74.7 76.3 75.8 72.8 73.5 71.8

Raw material consumed 1,576 1,353 1,481 1,661 1,978 2,257

RM as % of costs 63.8 57.3 53.7 52.6 54 54.3

% to net sales 47.6 43.7 40.7 38.3 39.7 39

Power & fuel 93 150 184 229 250 275

Employee expenses 224 236 362 413 456 508

% to net sales 6.8 7.6 10 9.5 9.2 8.8

Selling & Distribution expenses 257 269 289 340 390 453

Administrative expenses 115 107 136 163 185 208

Other expenses 351 417 468 553 625 698

EBITDA 715 601 753 1,025 1,151 1,446

EBITDA margin (%) 21.6 19.4 20.7 23.6 23.1 25

Depreciation 78 81 127 138 144 149

Other Income 123 126 170 150 150 150

EBIT 760 645 796 1,037 1,157 1,447

Interest paid 2.0 2.0 3.0 4.0 5.0 6.0

Pre-tax Profit 758 792 1,251 1,033 1,152 1,441

Tax (current+deferred+FBT) 48 86 250 155 173 216

Net Profit 710 705 1,002 878 979 1,225

PAT margin (%) 21.4 22.8 27.6 20.2 19.7 21.2

AGROCHEMICALS AND SEEDS 50

B&K RESEARCH APRIL 2009

Balance Sheet
(Rs mn) FY06 FY07 FY08 FY09E FY10E FY11E

Current Assets 3,454 3,570 4,571 3,611 4,628 5,915

- Cash & bank balance 147 138 250 275 294 324

- Marketable securities 502 1,822 2,551 1,253 2,000 2,982

- Debtors 291 182 252 361 438 495

- Inventory 1,029 955 1,069 1,232 1,415 1,644

- others 1485 475 449 490 480 470

Net fixed assets 754 1,126 1,144 1,101 1,063 981

Other non-current assets 15 16 15 15 15 15

Total assets 4,223 4,712 5,730 4,726 5,705 6,910

Current liabilities 953 962 3,069 1,369 1,581 1,812

Total liabilities 953 962 3,069 1,369 1,581 1,812

Share capital 86 86 86 86 86 86

Reserves & surplus 3,184 3,663 2,575 3,271 4,038 5,011

- Retained Earnings 1,770 2,249 1,161 1,857 2,624 3,597

- Share Premium 1,414 1,414 1,414 1,414 1,414 1,414

Shareholders’ funds 3,270 3,750 2,661 3,357 4,124 5,097

Total equity & liabilities 4,223 4,712 5,730 4,727 5,705 6,910

Capital employed 3,270 3,750 2,661 3,357 4,124 5,097

AGROCHEMICALS AND SEEDS 51

B&K RESEARCH APRIL 2009

Cash Flow Statement

(Rs mn) FY06 FY07 FY08 FY09E FY10E FY11E

Pre-tax profit 758 792 1,251 1,033 1,152 1,441

Depreciation 50 67 119 138 144 149

Chg in working capital (1,414) 1,277 3 (225) (69) (84)

Total tax paid (70) (87) (248) (155) (173) (216)

Cash flow from oper. (a) (676) 2,048 1,126 790 1,054 1,291

Capital expenditure (159) (438) (137) (94) (106) (67)

Chg in investments 1,515 (1,320) (730) 1,298 (747) (982)

Other investing activities 18 (4) – – – –

Cash flow from inv. (b) 1,374 (1,762) (867) 1,205 (853) (1,049)

Free cash flow (a+b) 698 286 258 1,995 201 242

Debt raised/(repaid) (20) – – – –

Dividend (incl. tax) (1,309) (295) (146) (1,969) (182) (212)

Cash flow from fin. (c) (1,329) (295) (146) (1,969) (182) (212)

Net chg in cash (a+b+c) (631) (10) 112 26 19 30

AGROCHEMICALS AND SEEDS 52

 B&K RESEARCH APRIL 2009

Monsanto India

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) FY08 FY09E FY10E FY11E Yr end 31 Mar (Rs mn) FY08 FY09E FY10E FY11E

Net sales 3,635 4,337 4,982 5,785 Pre-tax profit 1,251 1,033 1,152 1,441
Growth (%) 17.6 19.3 14.9 16.1 Depreciation 119 138 144 149
Chg in working capital 3 (225) (69) (84)
Operating expenses (2,919) (3,359) (3,884) (4,400)
Total tax paid (248) (155) (173) (216)
Operating profit 716 979 1,098 1,385
Cash flow from oper. (a) 1,126 790 1,054 1,291
Other operating income 37 46 53 61
Capital expenditure (137) (94) (106) (67)
EBITDA 753 1,025 1,151 1,446 Chg in investments (730) 1,298 (747) (982)
Growth (%) 25.5 36.0 12.3 25.7 Cash flow from inv. (b) (867) 1,205 (853) (1,049)
Depreciation (127) (138) (144) (149) Free cash flow (a+b) 258 1,995 201 242
Other income 170 150 150 150 Dividend (incl. tax) (146) (1,969) (182) (212)
EBIT 796 1,037 1,157 1,447 Cash flow from fin. (c) (146) (1,969) (182) (212)
Net chg in cash (a+b+c) 112 26 19 30
Interest paid (3) (4) (5) (6)
Pre-tax profit 793 1,033 1,152 1,441
(before non-recurring items) Key Ratios
Non-recurring items 459 0 0 0 Yr end 31 Mar (%) FY08 FY09E FY10E FY11E
Tax on non-recurring items (92) 0 0 0 EPS (Rs) 73.5 101.7 113.5 142.0
Pre-tax profit 1,251 1,033 1,152 1,441 EPS growth 11.0 38.3 11.6 25.1
(after non-recurring items) Book NAV/Share (Rs) 308.3 389.0 477.9 590.6
Tax (current + deferred) (250) (155) (173) (216) Dividend/Share (Rs) 207.0 18.0 21.0 25.0
Net profit 1,002 878 979 1,225 Dividend paout ratio 329.3 20.7 21.7 20.6
Adjusted net profit 635 878 979 1,225 Tax 19.9 15.0 15.0 15.0
EBITDA margin 20.5 23.4 22.9 24.7
Growth (%) 11.0 38.3 11.6 25.1
EBIT margin 21.7 23.7 23.0 24.8
Net income 1,002 878 979 1,225
RoCE 24.8 34.5 30.9 31.4
Net debt/Equity (105.3) (45.5) (55.6) (64.9)
Balance Sheet
Yr end 31 Mar (Rs mn) FY08 FY09E FY10E FY11E Valuations
Current assets 4,571 3,611 4,628 5,915 Yr end 31 Mar (x) FY08 FY09E FY10E FY11E
Cash & marketable securities 2,801 1,528 2,294 3,306 PER 19.3 14.0 12.5 10.0
Other non-current assets 15 15 15 15 PCE 16.1 12.1 10.9 8.9
Net fixed assets 1,144 1,101 1,063 981 Price/Book 4.6 3.7 3.0 2.4
Total assets 5,730 4,726 5,705 6,910 Yield (%) 14.6 1.3 1.5 1.8
EV/Net sales 2.6 2.5 2.0 1.5
Current liabilities 3,069 1,369 1,581 1,812 EV/EBITDA 12.6 10.5 8.7 6.2

Total liabilities 3,069 1,369 1,581 1,812

Du Pont Analysis – ROE
Share capital 86 86 86 86 Yr end 31 Mar (x) FY08 FY09E FY10E FY11E
Reserves & surplus 2,575 3,271 4,038 5,011 Net margin (%) 17.5 20.2 19.7 21.2
Shareholders’ funds 2,661 3,357 4,124 5,097 Asset turnover 0.7 0.8 1.0 0.9
Total equity & liabilities 5,730 4,727 5,705 6,910 Leverage factor 1.6 1.7 1.4 1.4
Capital employed 2,661 3,357 4,124 5,097 Return on equity (%) 19.8 29.2 26.2 26.6

AGROCHEMICALS AND SEEDS 53

 B&K RESEARCH APRIL 2009

UPDATE Rallis India Maintain BUY

Share Data Established player

Market Cap. Rs 5.4 bn (US$ 109.5 mn) Rallis India is the second largest player in the Indian agrochemical market (next only

Price Rs 448 to Bayer) with over 13% market share. The agriculture produce loss due to pests is
estimated to be over 22% of the total yield and only 25% of the area is treated with
Target Price Rs 622
pesticides, in India. With the Indian agriculture industry having a growth target of
BSE Sensex 10,967
over 4%, the agrochemical market will also have to thrive to support this growth,
Reuters RALL.BO
which augurs well for Rallis.
Bloomberg RALI IN
6m avg. daily turnover (US$ mn) 0.08 Year to March FY07 FY08 FY09E FY10E CAGR (%)
52-week High/Low 621/275 P&L Data (Rs mn) (FY08-10E)
Issued Shares 12 mn Net Sales 6,190 6,711 8,286 9,592 19.6

Valuation Ratios Operating Profit 131 587 1,043 1,238 45.2

Yr to 31 Mar FY09E FY10E Adjusted Net Profit 113 351 714 828 53.6

EPS (Rs) 59.6 69.1 Margins (%)

OPM 5.8 11.5 15.3 15.6 –
+/- (%) 103.6 15.9
NPM 1.8 5.2 8.6 8.6 –
PER (x) 7.5 6.5
Balance Sheet Data (Rs mn)
PBV (x) 1.5 1.3
Total Assets 5,036 5,509 6,349 7,385 15.8
Dividend/Yield (%) 2.5 2.7
Shareholders’ Funds 2,096 3,068 3,506 4,166 16.5
EV/Sales (x) 0.7 0.5
Per Share Data (Rs)
EV/EBITDA 4.3 3.4
EPS 9.4 29.3 59.6 69.1 53.6
Shareholding Pattern (%)
CEPS 22.8 41.9 72.2 87.7 44.7
Promoters 45
Dividend 8.0 16.0 11.0 12.0 (13.4)
FIIs 5
Returns (%)
MFs 24 RoE 6.0 13.6 21.7 21.6 –
BFSI’s 3 RoCE 10.1 22.7 31.8 32.1 –
Public & Others 23
• With over five decades of presence in the agricultural inputs market, Rallis has
Relative performance established a strong presence. The company is now well positioned to benefit from
700 the growth in pesticide sales and the improvement in realisations; revenues will
600 post 19.6% CAGR for the period FY08-10E.
500
400 • The company has restructured its debt burden through the sale of unutilised
300
assets and the net debt burden is only 11.9% of the total equity.
200
100 • With the benefits of the restructuring and the growth in the core business, we
0
expect earnings CAGR of 54.5% for the period FY08-10E. At the current price
Jan-04
Jul-04
Jan-05
Jul-05
Feb-06

Feb-07
Sep-07
Mar-08
Sep-08
Aug-06

Apr-09

of Rs 448, the stock trades at 7.5x FY09E and 6.5x FY10E earnings. We maintain
Rallis India (Actual) Buy rating on the stock, with the target price of Rs 622 (39% upside).
Sens ex

AGROCHEMICALS AND SEEDS 54

 B&K RESEARCH APRIL 2009

Investment arguments
Key player in the Indian agrochemical industry – a challenger
Rallis is the second largest agrochemical company in India with over 13% market
share. Rallis, being one of the key players in the Indian agrochemical industry, is
expected to benefit with its distribution reach, strong brand recall, and R&D capability.
Over time, Rallis has built a network of over 1,500 dealers, covering 80% of geographic
reach in India. Rallis has over 47 products covering insecticides, fungicides and
herbicides. It has been introducing three to five products every year. This helps it to
maintain a dynamic product portfolio by making available pesticides that are effective
against the pests which are specific to each season. Rallis products are targeted towards
key crops like paddy, wheat, cotton and vegetables and fruits. Together, these crops, in
India, constitute 75% of the overall sown area and 78% of the pesticide market. The
increase in realisations and improvement in sales will help the company to post a
CAGR of 19.6% for the period FY08-10E, in pesticide sales.

Pesticide revenue Product introduction

10,000 30 7 35
25 6
32
No. of Product

8,000
5
20 4 29
6,000

%
Rs mn

15 3 26
4,000 2
10 23
1
2,000 5 0 20
0 0 FY03 FY04 FY05 FY06 FY07 FY08
FY09E

FY10E
FY04

FY05

FY06

FY07

FY08

New Products Launched

Revenue contribution from products
Y03 FY04 FY05 FY06 FY07 FY0
Pes ticides YoY growth(%) launched 3 Years prior

Source: Company, B&K Research Source: Company

Focus on improving operational efficiency

Rallis has been focusing on financial restructuring between FY01-07. After retiring
most of debts, the company’s net debt-to-equity is now less than 12%. Beginning
FY08, the company is focusing on improving operational efficiency and rationalisation
of product portfolio to improve its operating margins. The company has shutdown
manufacturing operations in its Patancheru facility in Hyderabad. And has increased
the capacity utilisation in the Turbhe facility in Mumbai. Rallis has reduced the revenue
contribution from the few low margin products and concentrated the sales efforts
towards the products with higher gross contribution like Takumi and Applaud. Benefits
of all these initiatives have started accruing to the company with EBITDA margins
expanding by 354 bps in 9MFY09 to 14.4%. The company is confident about
improving the EBITDA margins from these levels in the coming years and is targeting
to achieve 25% EBITDA margins by 2012.

AGROCHEMICALS AND SEEDS 55

 B&K RESEARCH APRIL 2009

Net debt/equity, interest paid Operating profit

420 225 1,800 18
360 200 1,600 EBITDA 16
175 1,400 14
300 150 EBITDA Margins
1,200 12
240 125
Rs mn

1,000 10
100

Rs mn
180 75 800 8

%
120 50 600 6
25 400 4
60 0 200 2
0 (25) 0 0
(200) (2)

FY09E

FY10E
FY04

FY05

FY06

FY07

FY08 (400) (4)

FY09E

FY10E
FY04

FY05

FY06

FY07

FY08
Interes t paid Net debt / equity

Source: Company, B&K Research

Alliances – adding strength

Rallis has alliances with international agrochemical players like Syngenta, Bayer, Dow,
Nihon Nohayaku, FMC, BASF, and Dupont. These alliances with other companies
help Rallis to introduce internationally-proven products into the Indian market, with
reduced ‘time to market’. There have been 19 products launched through these
alliances, out of the total product portfolio of 47. The revenue contribution through
these alliances is ~27%. These allied companies, in turn source products like
hexaconazole, acephate and others, from Rallis. These alliances are expected to be
useful for the company when it establishes contracts for the new manufacturing facility.
The company is now working on registering some of the products from the alliance,
which are expected to be launched by FY10.
Product alliances
Company Products sourced Active ingredients sold

FMC Tatafuran (carbofuron), Electra (carbosulfan) and Impeder (bifenthrin)

Dupont Daksh (indoxacarb), Rekord (acetamiprid) Acetamiprid

Syngenta Preet (pretilachlor), Anant (thiomethoxam), Paralac Hexaconazole

(paraquat di chloride), Prabhaav (emmamectin), Sartaj (clodinofop)

Bayer Tata Mida (imidaclorpid), Spiro (thiodicarb). Achepate

Nihon Nohayaku Applaud (buprofezin), Fuji 1 (isoprothiolane)

Gharda Chemicals Fateh (sulfosulfuron), Koranda (chloro+cyper)

Makhteshim Agan Chemical Works Captaf (captan), Atrataf (atrazine), Novaluron (nova)

AGROCHEMICALS AND SEEDS 56

 B&K RESEARCH APRIL 2009

Rallis has tied up with Borax International, Yara International, and Nuziveedu Seeds
for the distribution of the water soluble fertiliser, plant growth nutrients, Bt cotton
seeds. Revenue from the distribution of products contributes ~4% to the overall
revenue. Revenue from the distribution business grew at 26% CAGR for the period
FY06-08. The company is planning to introduce new products in the plant growth
nutrient space and increase the sale of seeds. We expect revenue from this segment to
post 12.8% growth for the period FY08-10E.

Distribution alliances
Company Products sourced for distribution Target market

Yara International Water soluble fertilisers and calcium nitrate solution Horticulture crops and other drip-irrigated crops

Borax Solubor (boron 20%) Cotton, chillies, tomatoes, etc.

Nuziveedu Seeds Bt Cotton seeds Cotton

Source: Company

AGROCHEMICALS AND SEEDS 57

B&K RESEARCH APRIL 2009

Investment concerns
Diversification – Ad’venturing’ into new fields?
Rallis is contemplating entering allied fields like pharmaceuticals, construction chemicals,
home pesticides, and others, either organically or through acquisitions. The expansion
into any new unrelated fields will expose the company to investment risks. The company
is considering various opportunities to fuel the growth; these initiatives are all at the
nascent stage. However, we believe in the ability of the management to handle any new
ventures and possible support from other Tata Group companies.

Geographic concentration – Seasonal fluctuation

Rallis derives 79% of its revenue from domestic sales. Pesticide sales are highly
dependant on the incidence of pests and climatic conditions. The company’s revenue
is highly exposed to the monsoon conditions and seasonality of agriculture in India.
Revenue contribution remains skewed towards 2Q and 3Q , contributing over 62%
of the year’s sales. However, to mitigate the risk, Rallis is consciously making efforts to
increase its exports revenue, which is currently contributing only 21% and is aiming
to improve it to 40% by FY12.

Threat from GM crop – affects insecticide sales

An increase in the acreage of GM crops with traits including resistance to insects, is a
serious threat to the pesticide industry. Cotton, which used to contribute over 35% of
the pesticide sale in FY02, now constitutes only 26% in FY08. This could be attributed
to the increase in the Bt cotton acreage. The Bacillus thuringiensis (Bt) gene in the seed
variety has developed resistance against bollworm, the key pest in the cotton crop.
However, the new seed varieties have given rise to secondary pests, and increased the
usage of herbicides.

AGROCHEMICALS AND SEEDS 58

 B&K RESEARCH APRIL 2009

Valuations
Bayer CropScience, Rallis India, Syngenta, United Phosphorus, Excel Crop Care and
BASF are the key players in the Indian agrochemical sector. The agrochemical sector
is highly vulnerable to seasonal fluctuations and the incidence of pests in the crops.
Rallis, with its dynamic product portfolio, is well poised to take advantage of the
opportunities within the sector. The company is expected to post revenue of 19.6%
and net profit CAGR of 53.6%. After financial restructuring and the exit of the
unrelated business, the company’s financial leverage stands at comfortable 11.9%
(net debt/equity).

At Rs 448, Rallis trades at 7.5x FY09E and 6.5x FY10E earnings. It trades at an EV/
EBITDA of 4.3x and 3.4x FY09E and FY10E estimated earnings.

Considering the growth prospects, we look at a target price of Rs 622 based on P/E
of 9x FY10E earnings, which is justified with the PEG of 0.57x on the expected
earnings growth of 16%. Rallis is contemplating tapping a Rs 10 bn contract
manufacturing opportunity and encashing the unutilised assets. We have not factored
in any upside from these initiatives as these are all at the nascent stage. Any positive
development in this space will be a upside risk to our target price. We initiate coverage
with a Buy.

PER Band EV/EBITDA Band

3,000 2,500
41.1x
2,500 2,000 16.2x
32.2x
2,000 13.0x
1,500
1,500 23.2x
9.7x
1,000
1,000 14.2x 6.5x

500 500 3.3x

5.3x
0 0
Oct-05

Oct-06

Oct-07

Oct-08
Oct-05

Oct-06

Oct-07

Oct-08

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Source: B&K Research

AGROCHEMICALS AND SEEDS 59

 B&K RESEARCH APRIL 2009

Business overview
Rallis India, a Tata Group pedigree, is the second largest company in the Indian crop
protection market. The company’s agro input products include pesticides, seeds and
specialty fertilisers. In the past, Rallis had interests in various unrelated businesses,
which the company restructured and it has now become a focused agricultural inputs
player.

Business structure

Rallis India

Pesticide Seed Fertiliser Tanning Materials

Pesticide (95% of revenues)

Rallis’ pesticide product portfolio encompasses insecticides, fungicides and herbicides.
Rallis’ product line includes both products developed in-house (30) and products
licensed (17) from alliance partners. Revenues from pesticides witnessed a CAGR of
11.3% for the period FY04-08. The company in FY08 has taken the initiative to
restructure its product portfolio in pesticides, to concentrate on high margin products
and is moving out of low margin products. However, it has retained some low margin
products for which it has a good market share.

Pesticide revenue Pesticide revenue break-up

10,000 30
38%
25
27%
8,000
20
6,000
Rs mn

15
4,000
10
2,000 5
0 0 35%
FY09E

FY10E
FY04

FY05

FY06

FY07

FY08

Technicals Formulations

Pes ticides YoY growth(%) Alliance products

Source: Company, B&K Research Source: Company

Within the Indian agrochemical market, Rallis holds ~13% market share. Rationalisation
of its product portfolio and improvement in its realisations helped the company post
revenue growth of 8.7% in FY08. The company’s pesticide business is expected to
post revenue CAGR of 20.6% for the period FY08-10E.

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B&K RESEARCH APRIL 2009

Pesticide exports
Exports of pesticides contribute 21% to the overall revenues. The company is aiming
to improve the export revenue contribution to 40% by FY12. Rallis exports key
molecules like metaconazole, acephate, hexaconazale, imidachlorprid, and others. In
FY08, the company began sales of pendimethalin, targeted at the turf and ornamental
segment (~4% of the US pesticide market) in the US. It has established a subsidiary in
Australia to explore further opportunities in the exports market. It has contract
manufacturing agreements with companies like Syngenta, Kureha, and Makhteshim
Agan. The company is in discussion with few other MNCs for establishing similar
contract manufacturing and supply agreements. The company during 1HFY09 has
signed an agreement for increasing the capacity for Metconazole (manufactured for
Kureha, Japan) and established high-end polymer manufacturing unit for supplying
PEKK used in aircrafts. The company will be the sole supplier of PEKK for Cytec
Engineered Materials, USA.

Export revenues
1,750

1,500

1,250

1,000
Rs mn

750

500

250

0
FY04 FY05 FY06 FY07 FY08

Source: Company

Product strategy
Rallis, with the focus on the generics space in agrochemicals, has been launching three
to six new products every year. It leverages both in-house R&D initiatives and alliances
for product development. This helps it to maintain a dynamic product portfolio by
making available the pesticides that are effective against any pests particular to the
season. Products launched three years before, have continued to contribute 25-30%
of the company’s revenue since FY01. In FY08, the company launched five new
products (three insecticides and two fungicides) and has applied for approval of three
more products. Rallis products are targeted towards key crops like paddy, wheat,
cotton and vegetables & fruits. These crops in India constitute 75% of the overall
sown area and 78% of the pesticide market.

AGROCHEMICALS AND SEEDS 61

 B&K RESEARCH APRIL 2009

Pesticide revenue break-up Pesticide revenue

7 35
8% 6
19% 32

No. of Product
5
4 29

%
3 26
2
73% 23
1
Ins ecticides Fungicides 0 20
FY03 FY04 FY05 FY06 FY07 FY08
Herbicides New Products Launched
Revenue contribution from products launched 3 Years prior

Source: Company
Rallis is looking to launch two new products, fungicide and herbicide, by 2009. These
products are expected to be launched from alliance partners’ product portfolio, in the
lines of Applaud and Takumi. The company does not focus on in-house R&D and has
decided to rely on Advinus Therapeutics for the same, to which it divested the entire
clinical research and R&D facilities at Bangalore in FY06. Rallis holds over 15% stake
in Advinus Therapeutics.

Key products
Brand Active ingredient Target crop Type of pesticide

Applaud Buprofezin – Insecticide

Contaf Hexaconazole Paddy, grapes, chillies Fungicide

TataMida Imidacloprid Cotton, paddy, mango, sugarcane Insecticide

Asataf Acephate Tobacco, sugarcane, cotton, chillies, Insecticide

vegetables, fruits and cereals

Rogor Dimethoate Effective against sucking pest, Insecticide

chewing insects in most crops

Alliances
Rallis, with the aim of maintaining a dynamic product portfolio, has established links
with other international agrochemical companies like Bayer, Syngenta, Nihon Nohayaku,
FMC, BASF and Dupont. Rallis sources product formulations and technicals from
these companies and markets them.

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 B&K RESEARCH APRIL 2009

Product alliances
Company Product (Active ingredient) Nature of use

E. I. Dupont Daksh (indoxacarb) Control of American Bollworm on cotton and gram

Preet ( pretilachlor) Rice herbicide

Anant (thiomethoxam) Control of sucking pests on cotton and BPH (a pest) on rice
Syngenta India
Sartaj (clodinofop) Wheat herbicide

Prabhaav (emmamaectin benzoate) Control of all types of bollworm on cotton

Atrataf (atrazine) Sugar cane herbicide

Makhteshim Chemical
Captaf (captan) General use fungicide

Bayer India Spiro (thiodicarb) Control of spotted bollworm on cotton, vegetables

Nihon Nohayaku Fuji one Control of blast on rice

Tata furan (carbofuran) Granular insecticide for the control of rice pests

FMC India Electra (carbosulfan) Control of fruit and shoot borer on brinjal

Impeder (bifenthrin) Control of sucking pest & initial boll worm on cotton

Fateh (sulfosulfuron) Wheat herbicide

Gharda Chemicals
Koranda (chloro + cyper) General insecticide on cotton, rice

Seeds and specialty fertilisers (4% of revenues)

Rallis has also entered into a distribution tie-up with other specialty fertiliser
manufacturers and seed companies. The company distributes water-soluble fertilisers
for Yara International, Norway and Solubor (a water-soluble form of boron) for
Borax International, UK. Rallis currently imports these products and distributes them
in India. Rallis is looking to launch Granubor, a granular form of boron, from Borex.
This product will be targeted at areas where water availability for spraying is limited.
Distribution alliances
Company Products sourced for Distribution Target crops

Yara International Water-soluble fertilisers and calcium nitrate solution Horticulture crops and other drip irrigated crops

Borax Solubor (boron 20%) Reduces flower drop: cotton, chillies, tomatoes, etc.

Nuziveedu Seeds Hybrid seeds Bt cotton, maize, paddy, wheat, etc.

Rallis also distributes seeds bought out from Nuziveedu Seeds Ltd. Sales of Bt cotton
seed are the main contributor in the seeds space. Rallis also sells seeds of maize,
paddy, wheat, etc.

Sales of fertiliser and seeds constitute more than 4% of the Rallis revenue. The
introduction of new products and improvements in seed hybridisation will drive the
growth of the segment over the next few years. Revenue from the distribution of the
product is expected to post a CAGR of 12.4% for the period FY08-09E.

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Establishment of a new facility for contract manufacturing

Rallis is setting up a manufacturing facility at Dahej, Gujarat. It has obtained
environmental clearance and other regulatory approvals for the same. Rallis is looking
to sign contract manufacturing deals for the planned manufacturing facility. The
company earlier had envisaged a capex of over Rs 2 bn for this specialty chemical
facility in 150 acres. However, the company is now intending to develop only facilities
with capacity for which they were able to sign supply agreements. The capex for FY09
is expected to be ~Rs 200 mn. The company is yet to establish contracts and has been
negotiating with the existing clients to sign contracts for new products.

Business restructuring
Rallis initiated the restructuring process in FY01, through consolidation, a merger
and selling off various businesses. Prior to FY01, Rallis had diverse business interests
like pesticides, pharmaceuticals, animal feed, fine chemicals, fertiliser distribution and
various others. With the aim of reducing the debt burden and to increase the focus on
its core business, the company sold some legacy properties and the pharma, fine
chemicals and knowledge service businesses. This helped the company raise over
Rs 5.3 bn between FY01 and FY08. The company used these funds to pay off the
debt which has been reduced from Rs 4.3 bn in FY01 to Rs 439 mn in FY08.

Asset/Business sold between FY01 and FY08

Asset Sold to Rs mn

FY01 Pharmaceutical business Sherya Life Science 490

FY01 Land in Andheri, Mumbai Tata Sons 560

FY02 22 acres of land in Andheri, Mumbai TCS 1330

FY04 Gelatine business Sterling Biotech 470

Ralli House, Mumbai TCS 560

FY06 R&D facility, Bangalore Advinus Therapeutics 260

FY07 34 acres of land Patancheruvu, Hyderabad Godrej Properties 570

FY08 31 acres of land Patancheruvu, Hyderabad Peninsula Land 900

The company had 150 acres in Patancheru, Hyderabad, of which 65 acres has already
been sold and the remaining 85 acres are yet to be sold.

AGROCHEMICALS AND SEEDS 64

 B&K RESEARCH APRIL 2009

Rallis India

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E

Net sales 6,190 6,711 8,286 9,592 Pre-tax profit 550 1,462 1,033 1,332
Growth (%) 4.6 8.4 23.5 15.8 Depreciation 277 157 151 222
Chg in working capital 76 (1,044) 12 (78)
Operating expenses (6,058) (6,124) (7,242) (8,354)
Total tax paid 9 (219) (428) (426)
Operating profit 131 587 1,043 1,238
Cash flow from oper. (a) 912 356 768 1,050
Other operating income 240 211 265 307 Capital expenditure (65) (195) (185) (350)
EBITDA 372 798 1,309 1,545 Chg in investments 178 (238) 0 0
Growth (%) (12.9) 114.7 64.0 18.1 Cash flow from inv. (b) 113 (433) (185) (350)
Depreciation (160) (151) (151) (222) Free cash flow (a+b) 1,024 (77) 583 700
Other income 56 27 28 37 Equity raised/(repaid) 33 14 0 0
Debt raised/(repaid) (809) 91 0 (91)
EBIT 268 675 1,186 1,360
Dividend (incl. tax) (130) (189) (533) (245)
Interest paid (109) (37) (34) (28)
Other financing activities (30) 7 0 0
Pre-tax profit 159 638 1,152 1,332 Cash flow from fin. (c) (935) (77) (533) (336)
(before non-recurring items) Net chg in cash (a+b+c) 89 (154) 50 363
Non-recurring items 391 824 (119) 0
Pre-tax profit 550 1,462 1,033 1,332
Key Ratios
(after non-recurring items)
Tax (current + deferred) 31 (210) (361) (426) Yr end 31 Mar (%) FY07 FY08 FY09E FY10E
Net profit 581 1,252 673 906 EPS (Rs) 9.4 29.3 59.6 69.1
Adjusted net profit 113 351 714 828 EPS growth (47.3) 210.1 103.6 15.9
Growth (%) (47.3) 210.1 103.6 15.9 Book NAV/Share (Rs) 174.9 256.0 292.6 347.6
Preference dividend (77) (77) (77) (77) Dividend/Share (Rs) 8.0 16.0 11.0 12.0
Net income 504 1,175 595 828 Dividend paout ratio 99.1 63.9 21.6 20.3
Tax rate (5.6) 14.4 34.9 32.0
EBITDA margin 5.8 11.5 15.3 15.6
Balance Sheet EBIT margin 4.3 10.1 14.3 14.2
Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E RoCE 10.1 22.7 31.8 32.1
Net debt/Equity 5.7 11.9 9.0 (3.3)
Cash & marketable securities 229 75 122 485
Other current assets 2,926 3,268 4,026 4,571
Valuations
Investments 317 555 555 555
Yr end 31 Mar (x) FY07 FY08 FY09E FY10E
Net fixed assets 1,441 1,479 1,513 1,641
Other non-current assets 122 132 132 132 PER 47.4 15.3 7.5 6.5
Total assets 5,036 5,509 6,349 7,385 PCE 19.7 10.7 6.2 5.1
Price/Book 2.6 1.7 1.5 1.3
Yield (%) 1.8 3.6 2.5 2.7
Current liabilities 2,591 2,002 2,403 2,870
EV/Net sales 0.9 0.9 0.7 0.5
Total Debt 348 439 439 348
EV/EBITDA 14.8 7.2 4.3 3.4
Total liabilities 2,939 2,441 2,842 3,218

Du Pont Analysis – ROE

Share capital 1,000 1,000 1,000 1,000
Reserves & surplus 1,118 2,076 2,514 3,174 Yr end 31 Mar (x) FY07 FY08 FY09E FY10E

Less: Misc. expenditure (21) (7) (7) (7) Net margin (%) 1.8 5.2 8.6 8.6
Shareholders’ funds 2,096 3,068 3,506 4,166 Asset turnover 1.2 1.3 1.4 1.4
Total equity & liabilities 5,036 5,509 6,349 7,385 Leverage factor 2.7 2.0 1.8 1.8
Capital Employed 2,444 3,507 3,945 4,514 Return on equity (%) 6.0 13.6 21.7 21.6

AGROCHEMICALS AND SEEDS 65

 B&K RESEARCH APRIL 2009

UPDATE Bayer CropScience Maintain BUY

Share Data Consolidating its position in agri inputs

Market Cap. Rs 9.9 bn (US$ 201 mn) Bayer CropScience (Bayer) is the leader in Indian agrochemicals market, with a market
share of over 15%. Having also entered seed distribution, Bayer now provides a
Price Rs 250
complete crop solution. Bayer has been restructuring its product portfolio to
Target Price Rs 474
concentrate on high margin products. With plans to introduce ten new products over
BSE Sensex 10,967 the next four years, we see Bayer’s core business positioned well to capture the
Reuters BAYE.BO agrochemical growth opportunity. With further developments on Bayer land at Thane,
Bloomberg BYRCS IN the chances of land sale seem bright too.
6m avg. daily turnover (US$ mn) 0.05
Year to March CY06 FY08 FY09E FY10E CAGR (%)
52-week High/Low 343/180
P&L Data (Rs mn) (FY08-10E)
Issued Shares 39.5 mn
Net Sales 7,278 11,634 13,660 15,207 14.3
Valuation Ratios Operating Profit 461 149 729 858 140.1
Yr end 31 Mar FY09E FY10E Net Profit 569 491 963 1,166 54.1
EPS (Rs) 23.8 29.5 Margins (%)
+/- (%) 95.5 23.9 OPM 12.3 7.6 10.8 11.4 –
PER (x) 10.5 8.5 NPM 6.8 5.2 7.1 7.7 –
PBV (x) 2.2 1.8 Balance Sheet Data (Rs mn)
Dividend/Yield (%) 1.0 1.0 Total Assets 6,435 8,403 9,126 10,391 11.2

EV/Sales (x) 0.7 0.6 Shareholders’ Funds 3,314 3,694 4,547 5,602 23.1

EV/EBITDA 6.3 5.2 Per Share Data (Rs)

EPS 12.5 12.2 24.4 29.5 55.6
Shareholding Pattern (%)
CEPS 19.8 17.5 30.4 35.8 43.0
Promoters 71
Returns (%)
FIIs 1
RoE 16.0 11.0 23.4 23.0 –
MFs 2
RoCE 21.4 15.8 32.9 32.7 –
BFSI’s 9
Public & Others 16 • New products contributed 30% to Bayer’s revenue in FY08. Flubendiamide and
tebuconazole, the two molecules launched, have been well accepted. Bayer plans
Relative performance
to launch ten new products over the next four years in India.
1,200
1,000 • Bayer is the leader in hybrid rice seed segment in India. We see the seeds business
800 growing at 15-20% for Bayer.
600
• Significant developments on the 108 acre land occupied by Bayer at Thane have
400
200 brightened the chances of a land sale by the company. Having given VRS to 120
0 employees to date, Bayer has now entered into an agreement with Lanxess, in which
Jan-04
Jul-04
Jan-05
Jul-05
Feb-06

Feb-07
Sep-07
Mar-08
Sep-08
Aug-06

Apr-09

Lanxess has agreed to move to an alternative location in a phased manner, by 2009.

• At the current market price of Rs 250, the stock trades at 10.5x and 8.5x FY09E
Bayer CropScience
Ltd. (Actual) and FY10E earnings of Rs 23.8 and Rs 29.5, respectively. We remain positive and
Sens ex
maintain our Buy call on the stock, with the target price of Rs 474, (90% upside).

AGROCHEMICALS AND SEEDS 66

 B&K RESEARCH APRIL 2009

Investment arguments
New product strategy generating good results
Bayer CropScience has been in the process of restructuring its product portfolio to
concentrate on safer and high margin products. India has been the key focus area for
Bayer’s parent, Bayer AG, Germany. Having obtained registration for 2 new crop-
protection molecules (Flubendiamide and Tebuconazole) in 2008, Bayer plans to
introduce 10 new products over the next four years in the key crop segments of rice,
cotton and vegetables, among others. New products launched since 2007 have
contributed to 30% of their turnover in the mid term. In the process of churning its
portfolio, Bayer has been able to achieve improvement in margins (EBITDA for 9MFY09
13.3% versus 9.3% in 9MFY08). With a share of around 15% in the Indian crop
protection market, Bayer’s products have been the most popular among the farmers.
Coupled with rising demand, with Bayer’s strategy to continue introducing new products,
we see Bayer revenue growing at 46% and 11%, respectively, in FY09E and FY10E.
New product launches
Brand Active ingredients Type of pesticide Target crop

Launched Fame 450 SC Flubendiamide Insecticide Rice and cotton

in FY08 Floicur 250 EC Tebuconazole Fungicide Rice, chilli, groundnut

Monceren Imidacloprid 120 + pencycuron 250 Fungicide Rice

Products planned Sectin 60 WG – Fungicide Potato and grape

for FY09 Regent 80 WG Fipronil Insecticide Rice and vegetable

Nativo 75 WG Tebuconazole 200 + Trifloxystobin 100 Fungicide Rice, grape, and chilli

Label expansions
Brand Active ingredients Type of pesticide Crops added

Label Expansion in FY08 Fipronil 0.3 GR Fipronil Insecticide Sugarcane

Whip Super Fenoxaprop-p-ethyl Herbicide Rice

Gaucho imidacloprid 70 WS Insecticide For mustard seed treatment

Label Expansion planned for FY09 Whip Super Fenoxaprop-p-ethyl Herbicide Black gram

Admire 70 MG imidacloprid Insecticide Okra

Change in strategy to raise margins consistently

Bayer has been in the process of churning its portfolio over the past couple of years
to concentrate on high margin and safer products. With 30% of revenue coming from
new products, Bayer’s margins have seen record highs for two years. Bayer margins
will increase by 320 bps from 7.6% in FY08, to 10.8% in FY09E. With plans to
introduce 10 new products over the next four years, we can see further improvement
in margins in the future.

AGROCHEMICALS AND SEEDS 67

B&K RESEARCH APRIL 2009

Complete crop solutions player

With crop protection chemicals seeing flat growth globally, many players have moved
from being a pure crop protection play to a complete crop solution provider. Having
entered into a distribution agreement with Bayer Bioscience, Bayer has also entered
into the sale of seeds. This has resulted in a positive revenue growth for the company
of more than 53% in 1QFY09 (peak season for seed sale in India), with seeds
contributing significantly to the total revenue. Though 2008 can be seen as an
extraordinary year (high promotional expenses due to first year of seed sales) in terms
of growth, we see seeds continue the growth trajectory to contribute positively to the
overall revenue growth.

Exports offering hedge to seasonality

To take advantage of the low cost manufacturing in India, Bayer has been using its
Indian subsidiary as an export hub to its sister concerns. Consequently, it has also set
up an additional facility exclusively for exports at Ankleshwar in Gujarat. Exports
forms 12% of Bayer’s revenue and has been growing at more than 10% per annum.
Exports offer an excellent hedge against the lean season in March.

Pesticide exports revenue

2,500

2,000

1,500
Rs mn

1,000

500

0
CY04 CY05 CY06 FY08 FY09E FY10E

Source: Company, B&K Research

Value unlocking from land sale looking brighter

Following the sale of the molecule Oxydementon to United Phosphorus, Bayer closed
its facilities at Thane. Bayer Land is spread across 108 acres and we have valued it at
Rs 13 bn. We see the net benefit (the government will receive 12% of the sale proceeds)
from a possible sale of land to be Rs 297/share. Though Bayer’s management has not
yet taken any decision regarding its Thane land, in all probability it will be put up for
sale. The upside from the Thane land sale seems bright, considering Bayer has offered
VRS to its Thane employees and Lanxess has accepted for relocation by 2009.

Along with VRS being given to 120 workers at the Thane Kolshet plant (for a total
cost of Rs 305 mn to date), there has been a significant development that has transpired
relating to Bayer’s Thane land. Bayer has agreed to compensate Lanxess India Pvt.

AGROCHEMICALS AND SEEDS 68

B&K RESEARCH APRIL 2009

Ltd. over an MOU signed earlier by Bayer, on 18 November 2004, to transfer a part
of the land at Kolshet, Thane to Lanxess (which was pending approval from the
Collector of Thane). This agreement has now been replaced by a new MOU entered
into on 20 December 2007. According to the new agreement, Lanxess has agreed to
exit the aforesaid land and building in a phased manner by 2009 and accordingly,
Bayer has agreed to pay Lanxess an amount equivalent to EUR 16 mn (Rs 920 mn) in
a phased manner. Bayer’s board approved this exit agreement on 21 January 2008.
Considering the huge upsides from a possible land sale in future, we see significant
value accruing to the shareholders.

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Investment concerns
Other group companies
Bayer AG has established subsidiaries with various other business interests. This
limits Bayer CropScience’s opportunity to explore other avenue within the agri space
in India. With the global presence of Bayer AG, Bayer CropScience export avenues
are limited to neighboring countries like Bangladesh, Nepal, Sri Lanka, etc.

Bayer AG – other group companies in India

Company Nature of business

Bayer BioScience Private Limited Plant breeding research and sale of field-crop seeds

Bayer MaterialScience Private Limited Producers of polymers and high-performance plastics

Bayer Pharmaceuticals Private Limited Handles Bayer’s pharmaceutical sales and

marketing operations in India

Bayer Polychem (India) Limited Handles Bayer’s diabetes care and animal health
businesses in India

Bilag Industries Private Limited Manufacturers of synthetic pyrethroids

Nunhems India Private Limited Plant breeding research, sales of vegetable hybrid seeds

Huge fluctuations
Due to its high dependence on agriculture and the seasonality factor, Bayer revenue
lacks consistency and remains uncertain and largely unpredictable. Being in a seasonal
industry, Bayer Cropscience is largely affected by fluctuations in terms of weather and
pest pressure. Moreover, its dependence on agriculture (which, itself, is rain dependant)
also makes its earnings cyclical. The September quarter alone contributes to more
than 30% of the annual revenue and 70% in terms of annual profits. However, due to
its seeds business (peak season, June quarter) and growth in exports, we may see more
consistency in its earnings in the future.

Seeds business yet to drive margins

Besides pesticides, Bayer recently entered the sale of seeds for Bayer Biosciences.
However, the sale of seeds (a relatively high margin business) does not appear to have
benefitted Bayer. In the peak quarter of seed sales, Bayer saw a drop in operating
margins from 9% to 4%. Though there is a transfer pricing risk to Bayer’s profitability
from the seeds business, it is still too early to gauge the potential impact.

Threat from GM crops

With the growing demand of genetically modified crops, many crop protection
companies face the threat of decreasing demand. In CY07, the spurt in cultivation of
Bt cotton resulted in decreasing demand for insecticides in India. Conventional cotton

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B&K RESEARCH APRIL 2009

was the largest consumer of insecticides, in the past. With wide acceptance of Bt
cotton, insecticides consumption dropped from 72% in 2001-02 to 62% of total
pesticides in 2006-07. With many more GM crops in the pipeline for approval by
2010, demand for pesticides may be significantly affected. Bayer gets 62% of its
business from insecticides. With 10% of the cotton crop yet to see adoption of GM
seeds, we may see a further decrease in demand for insecticides, going forward.

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 B&K RESEARCH APRIL 2009

Valuations
After the ongoing restructuring exercise, Bayer’s core business has been picking up.
Core business margins will improve from 7.6% in FY08 to 11.4% in FY10E. With
larger investment in the seeds business, margins have taken a hit in the past (being the
first year of seed sales). Bayer is the market leader in pesticide and hybrid rice sales in
India. Bayer plans to launch 10 new products in agrochemicals over the next 4 years
in India. Given the improving agrochemical scenario and good acceptance of Bayer
products by the farmer, we feel Bayer has equipped itself with new molecules at the
right time. With Bayer continuously restructuring to concentrate on safer and high
margin products, we continue to remain positive on the growth prospects of Bayer’s
core business. Further, with increasing adoption in the hybrid rice in India will provide
a significant upside for the seeds business.

At the current market price of Rs 250, Bayer trades at 10.5x and 8.5x FY09E and
FY10E earnings of Rs 23.8 and Rs 29.5, respectively. With key developments on the
land front and brighter prospects of land sale, we see land value contributing to
Rs 178 to the per share value of Bayer. We maintain our Buy call on the stock.
PER band EV/EBITDA
1,000 900
900 34.3x 800 19.1x
800 700 16.0x
28.5x
700 600
600 22.7x 13.0x
500
500 10.0x
16.9x 400
400
300 6.9x
300 11.1x
200 200 3.9x
100 100
0 0
Jan-06

Jul-06
Oct-06
Jan-07

Jul-07
Oct-07
Jan-08

Jul-08
Oct-08
Jan-09
Jan-06

Jul-06
Oct-06
Jan-07

Jul-07
Oct-07
Jan-08

Jul-08
Oct-08
Jan-09

Apr-06

Apr-07

Apr-08

Apr-09
Apr-06

Apr-07

Apr-08

Apr-09

Source: B&K research

AGROCHEMICALS AND SEEDS 72

 B&K RESEARCH APRIL 2009

Management
Bayer CropScience is an MNC based in Germany and managed by the promoters,
who hold a 71% share in its Indian subsidiary. Under the support of the parent’s R&D,
Bayer is able to introduce innovative molecules on a regular basis. Bayer CropScience
introduces at least two to three new products in India, each year. It plans to launch ten
Business mix new products over the next four years in India. Having entered seed distribution, the
16% management plans to continue to strengthen itself as a complete crop solution player.
11%
However, it is not very transparent and provides little clarity on its transfer pricing
plans with regard to the seeds business and its plans for utilisation of land at Thane
Kolshet, where its manufacturing unit has been shut down.
73%
Domes tic pes ticide s ales Product portfolio
Export s ales
Seeds Sales Bayer receives its revenue from sale of crop protection products in the domestic and
export market and also from the distribution of seeds for Bayer Biosciences.
Source: Industry
Crop protection
Sales of domestic crop protection products contribute around 70% of total Bayer
revenue. With a market share of 15%, Bayer’s products are the most popular with
farmers and industry users in India. Being the pioneer in introducing imidacloprid
molecule in India, 62% of Bayer’s portfolio constitutes insecticides. With the key-
Pesticide revenue mix crop strategy concentrating on rice, cotton and fruits and vegetables, Bayer introduced
flubendiamide (insecticide) and tebuconazole (fungicide) in 2007. Bayer has been
24%
churning its crop portfolio to include safer and high margin products over the past
two years. Consequently, margins in crop protection have risen from 18% to 21% in
the peak season of September 2007. New products contributed to around 30% of
14% 62%
the total revenue. Bayer now plans to introduce ten new products over the next four
Ins ecticides Herbicides
Fungicides years in India to strengthen its presence in India. We remain bullish on Bayer’s
agrochemical segment in India.
Source: Industry
Seeds
In order to provide a complete crop solution to the farmer, Bayer entered into a
distribution agreement with Bayer Biosciences to sell seeds through its distribution
network from 2007. Bayer Bioscience is the leader in the sale of rice seeds. Contributing
16% of total revenue, seeds have dragged down the overall margins of the company.
Being the first year of the seeds portfolio launch, the company seems to have invested
a greater amount in the recruitment and promotion of the seeds business. We see the
seed business contributing more positively in the future. However, lack of clarity over
the transfer pricing issue between the two companies, makes it difficult to understand
future margin contribution from the seed business.

AGROCHEMICALS AND SEEDS 73

B&K RESEARCH APRIL 2009

Seeds business – FY08

140

120

100

Rs ('000/tn)
80

60

40

20

0
Avg Sale price Avg Cos t Gros s profit

Source: Company

Exports
Exports constitute the sale of formulations to Bayer’s sister concerns, globally, and
neighbouring countries like Bangladesh, Nepal, Sri Lanka, etc., they form around 10%
of total business revenue. Though a relatively low margin business, Bayer plans to
expand this segment in a large way. We expect this segment to see an average growth
of 10-12% in the future.

Pesticide exports revenue

2,500

2,000

1,500
Rs mn

1,000

500

0
CY04 CY05 CY06 FY08 FY09E FY10E

Source: Company

AGROCHEMICALS AND SEEDS 74

 B&K RESEARCH APRIL 2009

Bayer CropScience

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) CY06 FY08 FY09E FY10E Yr end 31 Mar (Rs mn) CY06 FY08 FY09E FY10E

Net sales 7,278 11,634 13,660 15,207 Pre-tax profit 891 680 1,448 1,754
Growth (%) 8.8 27.9 46.8 11.3 Depreciation 168 (86) 238 249
Chg in working capital (449) 1,641 (581) (732)
Operating expenses (6,818) (11,485) (12,931) (14,349)
Total tax paid (386) (323) (539) (587)
Operating profit 461 149 729 858
Cash flow from oper. (a) 224 1,912 566 684
Other operating income 499 792 829 988
Capital expenditure (90) (839) (33) (160)
EBITDA 959 941 1,558 1,846
Chg in investments 0 (563) 0 (90)
Growth (%) 32.4 (21.5) 107.0 18.4 Cash flow from inv. (b) (90) (1,402) (33) (250)
Depreciation (287) (263) (238) (249) Free cash flow (a+b) 134 510 533 434
Other income 228 188 236 206 Debt raised/(repaid) (79) (389) (150) (200)
EBIT 901 866 1,557 1,802 Dividend (incl. tax) (99) (111) (111) (111)
Interest paid (85) (76) (108) (48) Cash flow from fin. (c) (178) (500) (261) (311)
Pre-tax profit 815 791 1,448 1,754 Net chg in cash (a+b+c) (44) 10 272 123
(before non-recurring items)
Non-recurring items 75 (111) 0 0 Key Ratios
Pre-tax profit 891 680 1,448 1,754 Yr end 31 Mar (%) CY06 FY08 FY09E FY10E
(after non-recurring items)
EPS (Rs) 12.5 12.2 23.8 29.5
Tax (current + deferred) (322) (189) (507) (588)
EPS growth 12.0 (2.4) 95.5 23.9
Net profit 569 491 942 1,166
Book NAV/share (Rs) 83.9 93.5 114.6 141.3
Adjusted net profit 493 602 942 1,166 Dividend/share (Rs) 2.4 1.9 2.4 2.4
Growth (%) 12.0 (2.4) 95.5 23.9 Dividend pay out 22.5 18.4 11.8 9.5
Net income 569 491 942 1,166 Tax rate 36.2 27.7 35.0 33.5
EBITDA margin 12.3 7.6 10.8 11.4
Balance Sheet EBIT margin 11.6 7.0 10.7 11.1
RoCE 21.4 15.8 32.9 32.8
Yr end 31 Mar (Rs mn) CY06 FY08 FY09E FY10E Net debt/Equity 24.6 11.3 (0.6) (6.3)
Cash & Marketable securities 266 276 548 671
Other current assets 4,549 4,880 5,513 6,654 Valuations
Investments 40 603 603 694 Yr end 31 Mar (x) CY06 FY08 FY09E FY10E
Net fixed assets 1,554 2,479 2,274 2,185
PER 20.0 20.5 10.5 8.5
Other non-current assets 26 165 165 165
PCE 12.7 14.3 8.4 7.0
Total assets 6,435 8,403 9,104 10,369 Price/Book 3.0 2.7 2.2 1.8
Yield (%) 1.0 0.8 1.0 1.0
Current liabilities 2,039 4,016 4,037 4,446 EV/Net sales 1.5 1.1 0.7 0.6
Total debt 1,081 692 542 342 EV/EBITDA 11.1 13.7 6.3 5.2
Total liabilities 3,120 4,708 4,579 4,788
Du Pont Analysis – ROE
Share capital 395 395 395 395 Yr end 31 Mar (x) CY06 FY08 FY09E FY10E
Reserves & surplus 2,919 3,299 4,130 5,185
Net margin (%) 6.8 5.2 6.9 7.7
Shareholders’ funds 3,314 3,694 4,525 5,580 Asset turnover 1.2 1.3 1.6 1.6
Total equity & liabilities 6,435 8,403 9,104 10,369 Leverage factor 2.0 1.7 2.1 1.9
Capital employed 4,396 4,387 5,067 5,923 Return on equity (%) 16.0 11.0 22.9 23.1
* - Bayer has changed the accouting period from CY to FY. FY08 results are for 15 - months ending march.

AGROCHEMICALS AND SEEDS 75

 B&K RESEARCH APRIL 2009

UPDATE United Phosphorus Downgrade to Outperformer

Share Data Global agrochemical company

Market Cap. Rs 50.2 bn (US$ 1,020 mn) United Phosphorus (UPL), backed by an aggressive management and strong research,

Price Rs 114 has been treading a high growth trajectory (revenue CAGR 45% over FY06-08). Key
acquisitions like Cerexagri (Europe), SWAL (India), Reposo (Argentina) and others
Target Price Rs 140
have hedged its revenue portfolio against cyclicality. Besides agrochemicals, with the
BSE Sensex 10,967
acquisition of Advanta (seeds player), UPL has emerged as a complete crop solution
Reuters UNPO.BO
provider, globally.
Bloomberg UNTP IN
Year ending March FY07 FY08 FY09E FY10E CAGR (%)
6m avg. daily turnover (US$ mn) 1.49
52-week High/Low 185/65 P&L Data (Rs mn) FY07-10E

Issued Shares 438.9 mn Revenue 23,112 35,155 50,100 55,992 26.2

EBITDA 5,650 7,055 9,884 11,078 25.3
Valuation Ratios
Reported Net Profit 2,608 2,575 5,728 6,840 63.0
Yr to 31 Mar FY09E FY10E
Margins (%)
EPS (Rs) 11.9 15.6
EBITDA 23.1 18.9 18.7 19.2 –
+/- (%) 38.6 30.5
Net Profit Margin 12.5 10.8 10.5 12.2 –
PER (x) 9.6 7.4
Balance Sheet Data (Rs mn)
PBV (x) 1.9 1.5
Total Assets 47,837 52,706 69,652 74,554 18.9
Dividend/Yield (%) 1.0 1.2
Shareholders’ Funds 14,947 22,375 27,097 33,235 21.9
EV/Sales (x) 1.3 1.2 Per share Data (Rs)
EV/EBITDA 6.9 5.8 Reported EPS 5.9 5.9 11.9 15.6 63.0
Shareholding Pattern (%) Cash EPS 10.3 12.1 15.6 19.3 26.2
Promoters 28 Returns (%)
FIIs 35 RoCE 13.8 15.7 19.1 19.4 –
MFs 20 RoE 20.8 20.2 21.1 22.6 –
BFSI’s 1
• Better margins and good revenue growth has been a key positive about the
Public & Others 16
company. For the full year FY09E, it is expected to make revenue of ~Rs 50 bn
Relative performance and EBITDA margin of 19%.

250 • The company has taken the riskier route (acquisitions) for the growth. Increase in
200 inventory, foreign currency loans, funding to Advanta and expected fall in
150 realisations are the near term concerns for the company.
100
• We see margins stabilising at 19% and EPS growing by 19% for FY10E. At the
50
current market price of Rs 114, the stock trades at 9.6x FY09E and 7.4x FY10E
0
earnings. With the near term concerns persisting, we downgrade the stock to
Jan-04

Mar-05
Oct-05
May-06
Dec-06
Jul-07
Feb-08
Sep-08
Aug-04

Apr-09

Outperformer, with the target price of Rs 140 (22% upside).

United Phos phorus Ltd
(Actual)
Sens ex

AGROCHEMICALS AND SEEDS 76

 B&K RESEARCH APRIL 2009

Investment arguments
Established player in the global agrochemicals market
United Phosphorus has been one of the best agrochemical stories in India. Having entered
into seeds business after the acquisition of Advanta (presently UPL has a 49.9% stake), UPL
has now become a provider of complete crop solutions. With 80% of its revenue coming
from international regions, UPL is one of the largest exporters of generic agrochemicals
from India. UPL is now well positioned to benefit from better agriculture prospects worldwide.
Europe and North America contributes ~55% of the revenues. The increase in demand for
agriculture inputs in Europe is driven by EU freeing up of set-aside land, which was 10%
earlier. Favourable exchange rates and improvement in realisations have helped the company
so far in FY09. For 9MFY09, the company posted revenue growth of 42%. With robust
demand in the international markets, the company will witness over 40% growth in FY09E.
With a huge unexplored opportunity of US$ 4-5 bn in generic agrochemicals, UPL’s business
is set to grow at above 10% p.a. in the future. Leveraging acquisitions and organic
opportunities, we see UPL’s earnings growing at 31% CAGR over the FY08-10E period.

Agrochemical companies sales growth for 2008 Geography-wise revenue mix

60
29% 28%
50
40
30
%

20
7%
10 7%

0
29%
United

Dow

Dupont
Cheminova

Syngenta

Bayer
Nufarm

BASF
Industry

MAI
Monsanto

Isagro
phos

Europe MEA
As ia Latin America
NAFTA

Source: Various news reports Source: Company

Inorganic route – driving global revenue

One of the expansion strategies adopted by UPL has been the acquisition of companies as
well as off-patented products from patented product manufacturers like Bayer, DuPont,
Dow Chemicals and others. In the past 10 years, UPL made 16 acquisitions including
products and company, (the largest one being Cerexagri for US$ 139 mn at EV/Sales of 0.6).
UPL is one of the most successful players with the ability to manage acquisitions for over a
decade now. Though in 2007 margins took a dip due to Cerexagri (with low margins 7-8%)
integration, UPL is on course to raise margins. We feel confident about the aggressive growth
strategy adopted by UPL. Given the rising cost of acquisitions, UPL has been waiting for the
right opportunity to make its next acquisition/alliance, mostly with backend players. Besides
the growth opportunities that acquisitions unleash, UPL’s ability to strike good deals and
integrate acquired facilities in a profitable way, makes it one of the best players in this space.

AGROCHEMICALS AND SEEDS 77

 B&K RESEARCH APRIL 2009

Revenue growth of key acquisitions

Reposo SWAL

25 1,400

20
1,050
15
US $ mn

Rs mn
700
10

350
5

0 0
FY05 FY08 FY05 FY08
Source: Company

Leveraging a strong research base

Besides inorganic opportunities, UPL’s indigenous research is clearly one of its potential
drivers for growth. In the generics space, it has been able to introduce three to four
products each year. In FY08, it has been successful in obtaining registration for four
new products. In the future, UPL plans to concentrate production on two molecules,
namely Mancozeb (UPL has 30% share in the US$ 340 mn market) and Glyphosate
(US$ 5.2 bn). It aims to be the world’s cheapest producer of Mancozeb in the next few
years. With the growing importance of GM crops, UPL has plans to enter the
Glyphosate molecule market shortly. Linked to a vast global distribution network and
backed by a strong research base, we see UPL’s organic revenue grow at an average
growth of 11% over the next two years.

Growth opportunities
UPL has immense growth opportunities to be unleashed for the future. Under a joint
venture with Ishihara, UPL has been manufacturing patented products at its facilities
for Ishihara, Japan. Within the next two years, it will be able to get registration for
these patented products, following which it will be selling them globally. Furthermore,
it acquired five products (three from Bayer and one each from DuPont and Dow) in
FY07 and another two products (from DuPont) in FY08. Benefits from each of these
acquisitions are yet to be realised. With 10% of new land coming under cultivation in
Europe and demand for agri-inputs growing, we see good revenue growth from the
European region. With a growing appetite for acquisitions, UPL appears well on track
to achieve 31% earnings CAGR over the FY08-10E.

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B&K RESEARCH APRIL 2009

UPL’s geography-wise revenue contribution and outlook

Geography Global market UPL revenue Market
contribution (%) contribution (%) outlook

Europe 32 28 Static to decline

Asia 23 29 Growth market

Africa & Middle East 4 7 Static to slow growth

Latin America 19 7 Growth market

NAFTA 23 29 Static to slow growth

Total (World) 100 100 Slow growth

Source: Company, Agreworld

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B&K RESEARCH APRIL 2009

Investment concerns
Change in EU regulations
EU parliament is proposing to bring changes in pesticide regulation. EU planning to
ban or reject approvals for substances which are expected to be endocrine disruptor.
The definitive implementation of the legislation is expected for the second half of
2010. The list of over 21 substances, which may be impacted with the new regulations,
include mancozeb, carbendazim, pendimethalin, etc. Europe contributes over 28%
to the UPL’s overall revenue and fungicides (mancozeb,etc.) are the key revenue
contributors in this geography. The details about the implementation of the new
regulation and the final list of active ingredients to be restricted/banned are not clear
as yet. Any development in this front might impact the UPL in the long-term.

Managing acquisitions
United Phosphorus’s strategy to focus on a healthy mix of organic and inorganic
opportunities has been generating incremental growth over the years. However, the
acquisition of companies with below average margins like Cerexagri, drags down the
margins and earnings of the combined entity. As expected, after the successful
acquisition of Cerexagri in FY07, margins took a dip from 27% to 19% in FY08.

Volatile input costs

Though we have seen an improvement in Cerexagri margins to some extent, UPL
margins over the past few quarters have been a concern. Volatility in the prices of key
raw materials like yellow and white phosphorus, and sulphur, and constraints on raw
material supply are some of the key reasons. UPL margins have fallen from 23% in
FY07 to 19% in FY08. Expected fall in realisations and high cost inventory as on
FY09 are the constraints in the near-term.

Forex fluctuations
With growing global acquisitions, exports have been a thrust area for United
Phosphorus. UPL gets 80% of its revenue from its international operations. The
depreciation of rupee had been a critical factor which has contributed ~7% growth in
revenue for 9MFY09. However, the foreign currency loans and imports have created
a natural hedge for UPL. With conversion of FCCB’s due by December 2010 and the
rising cost of imports, this advantage could diminish in future.

High debt
UPL has ~Rs 21 bn of debt (of which ~ US$ 300 mn forex loans). Increasing debt to
fund working capital requirements and Advanta India is the key concern. In current
tight liquidity situation, rolling over of the debt will be difficult and repricing the loans
will lead to higher interest outgo for the company. Further, the financial performance
of the company will be haunted by provisions for depreciation of the INR.

AGROCHEMICALS AND SEEDS 80

 B&K RESEARCH APRIL 2009

Valuations
UPL has placed itself in a strong position following the acquisition of players and
products in key regions of the US, Europe and Latin America. Over the past year, its
domestic revenue grew 17% and international revenue grew 65%. Cerexagri
integration has been smooth, barring delays in closure of one of its plants. Besides
acquisitions, UPL registered four new products (Mancozeb, Lambdacyhalothrin,
Imidacloprid and Imizatheria) in FY08 and has two others in the pipeline for launch.
Also, it plans to concentrate its manufacturing on two key molecules of Glyphosate
and Mancozeb in the future.

We expect revenue growth of around 11% for FY10E. On the margin front, falling
raw material prices will be neutralised by reduction in realisations. We see earnings
growing by 19% YoY to Rs 15.6 EPS in FY10E.

However, fall in agri commodity prices internationally, increase in debt, high cost
inventory, and expected fall in realisations will be the key challenges that the company
has to face in near term.

PER Band EV/EBITDA

500 450
450 27.7x 400 16.5x
400 350
23.6x 14.3x
350
19.5x 300
300 12.1x
250
250 15.3x 9.9x
200 200
11.2x 7.6x
150 150
100 5.4x
100
50 50 3.2x
0 0
Jul-05
Oct-05
Jan-06

Jul-06
Oct-06
Jan-07

Jul-07
Oct-07
Jan-08

Jul-08
Oct-08
Jan-09
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Jul-05
Oct-05
Jan-06

Jul-06
Oct-06
Jan-07

Jul-07
Oct-07
Jan-08

Jul-08
Oct-08
Jan-09
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09
Source: B&K research
With aggressive strategy, we see UPL poised for growth in revenue as well as earnings.
At the current market price of Rs 114, the stock is trading at 9.6x and 7.4x FY09E and
FY10E diluted earnings of Rs 11.9 and Rs 15.6, respectively. Key triggers for the
stock are new acquisitions and product launches. We remain positive on the long-term
prospects of United Phosphorus, while the company is expected to face challenging
time in the near term. With near term concerns persisting, we downgrade the stock to
outperformer with the target price of Rs 140 (22% upside)

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B&K RESEARCH APRIL 2009

Company background and management

The Indian MNC, based in Mumbai, is headed by the Shroff Group. The chairman is
Mr R.D. Shroff and Mr Jai and Mr Vikram Shroff are executive directors. UPL
management has shown an aggressive and proactive stance on growth over the past
couple of years. UPL has been seeking geographical expansion through a mix of
organic and inorganic strategy. With around 10 product and company acquisitions
since 2006, the company has seen revenue CAGR of 45% over FY06-08. It has
become the third largest player in generic agrochemicals, globally. The company’s
appetite for growth through acquisitions continues as it looks to integrate backward
by acquiring key players manufacturing rock phosphate in the Middle East. Having
acquired a 49.9% share in seeds company, Advanta India, It has become a complete
crop management player.

Product profile
Agrochemicals and speciality chemicals

Agrochemicals form 85% of the revenue for United Phosphorus. Key products
manufactured in India include aluminum phosphate and Monocrotophos among
others. Insecticides form 85% of the agrochemicals manufactured. New products
acquired by UPL over the past few years include Bensulfuron Methyl, Propanil, Supertin
and Vendex and products acquired from Bayer include Asulam, Oxydementon and
Trichlorofon. These products form 8-10% of UPL’s total revenue in FY08.

Within specialty chemicals, UPL manufactures chlor alkali and other industrial chemicals
which contribute to less than 10% of total revenue.
Key products
Segment Key products
Insecticides Acephate, Cypermethrin and Monocrotophos.
Herbicides Sulfuron (for wheat ), Clodinofop
Fungicides Mancozeb, Carbendizim, Metalaxyl

Geography wise revenue mix Product wise revenue mix

3% 12%
29% 28%
25%

7% 29%
7%

29% 31%
Europe MEA Speciality chemicals Fungicide
As ia Latin America Ins ecticides herbicides
NAFTA Others

Source: Company

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B&K RESEARCH APRIL 2009

Product got through acquisitions

Cerexagri (Rs 11 bn) was acquired by UPL in FY07 at EV/sales of 0.56. Its products
contribute ~32% to the total revenue of United Phosphorus. Cerexagri, the second
largest global producer of Mancozeb, raises UPL’s total market share in Mancozeb to
30%. However, the integration of the Mancozeb-based EBDC plant has seen some
delay due to a demand surge in Europe this season. Through this acquisition, UPL has
access to the following product portfolio, which includes a basket of ten to twelve
products, making the total number products under UPL around 30 to 40.

Cerexagri’s products
Product segments Products acquired

Insecticides Acetemaprid, Beta Cypermethrin, Microencapsulated

Methyl Parathion

Fungicides EBDC-Mancozeb, Copper & Sulphur based

Products, tin based products, Thiophanate methyl.

Herbicides Endothall

Specialty chemicals Water treatment chemicals, Decco (post-harvest

fruit preservation)

Cerexagri’s new product pipeline

Fumigants DMDS-fumigant to replace methyl bromide

Fungicides Innovative copper based products

AGROCHEMICALS AND SEEDS 83

 B&K RESEARCH APRIL 2009

Acquisition history
Year Acquired Acquired From Remarks

1994 MTM- Agrochem UK

1996 Agrodan A/s Denmark Acquired expertise in formulation technology.

1996 Devrinol USA

1997 Devrinol-ROW ROW-except Japan and US Acquired registrations, trademarks, goodwill and marketing rights from Zeneca.

2000 Devrinol-Japan Japan

2003 Oryzalin, Surflan Dow Agroscience Helps in expanding market presence in key fruit, nut and other specialty crop markets.

2004 Ultra Blazer Worldwide The sale includes all registrations, brands and trademarks stronger global
presence in key soybean and peanut markets.

2004 Lenacil, Cloradizon Europe

Nov’04 Ag Value USA Enlarges presence in North American markets.

Jun’05 SWAL India Access to markets Karnataka, Kerala, Tamil Nadu and Andhra. Acquired
products Acephate and Ethion.

2005 Cequisa Spain Offers 400 registrations worldwide. It’s a distributor and registrant of
agrochemicals. Strengthens presence in Europe and Africa.

Oct’05 Reposo Argentina A debt free company offers more than 30 registrations in Argentina.
Strengthens presence in Latin American markets.

Feb’06 Advanta Zeneca seeds Enables entry into seeds business

Mar’06 CropServe South Africa Has 5 subsidiaries 3 in Zambia, 1 in Malawi and1 in Mozambique. Gains
totally 11% in Villa, largest distributor of agrochemicals in South Africa.

Sep’06 Asulam, Triclorofon, Bayer Strengthens its portfolio of products.Offers access to products
Oxydemethon-Methyl registered markets.

Sep’06 Bensulfuron Methyl DuPont A High margin herbicide.

Nov’06 Cerexagri Arkema Complimentary portfolio of fungicides and water treatment chemicals. Offers
a new segment, Decco-fruit preservatives ~ 15% of Cerexagri revenue. But,
could dilute UPL’s Ebitda margins as Cerexagri had margins below 10%.

Nov’06 Propanil Dow Agroscience Enjoys Good margins. Has 100 registrations worldwide out of which 50% is
still unexplored.

Jun’07 Supertin and Vendex DuPont High margin insecticides would expand UPL’s position into the fruit, nuts
and vegetable pesticides market. Good Presence in North American and
European markets.

Jul‘07 ICONA Argentina A generic pesticide manufacturer with strong Presence in Argentina with 35
registrations.

Feb’08 Evofarms Latin America A generic product manufacturer strong distribution network and clientele
(Bagota, Columbia) would help UPL penetrate in Latam.

AGROCHEMICALS AND SEEDS 84

 B&K RESEARCH APRIL 2009

United Phosphorus

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E

Net sales 23,112 35,155 50,100 55,992 Pre-tax profit 3,104 3,013 5,549 7,961
Growth (%) 38.5 52.1 42.5 11.8 Depreciation 11,373 (997) 1,618 1,648
Operating expenses (18,827) (30,250) (42,025) (46,681) Chg in working capital 133 (2,892) (7,721) (5,523)
Operating profit 4,285 4,905 8,076 9,311 Total tax paid (154) (761) (563) (1,433)
Other operating income 1,366 2,151 1,583 1,767 Other operating activities (203) (751) 80 0
EBITDA 5,650 7,055 9,658 11,078 Cash flow from oper. (a) 14,254 (2,389) (1,038) 2,652
Growth (%) 17.0 24.9 36.9 14.7 Capital expenditure (19,241) 3,740 (3,502) (500)
Chg in investments (1,673) (3,660) 0 0
Depreciation (1,656) (1,522) (1,618) (1,648)
Other investing activities (20,914) 80 (3,502) (500)
Other income 232 311 314 277
Cash flow from inv. (b) (6,660) (2,308) (4,539) 2,152
EBIT 4,227 5,844 8,355 9,708
Equity raised/(repaid) 84 5,472 0 0
Interest paid (1,046) (1,688) (2,806) (1,747)
Chg in minorities 290 223 257 312
Pre-tax profit 3,181 4,156 5,549 7,961
Debt raised/(repaid) 7,465 (3,910) 4,400 (2,700)
(before non-recurring items)
Dividend (incl. tax) (470) 445 (959) (601)
Non-recurring items (76) (1,144) 0 0
Other financing activities (262) 420 0 0
Tax on non-recurring items 13 161 0 0 Cash flow from fin. (c) 7,107 2,650 3,698 (2,989)
Pre-tax profit 3,104 3,013 5,549 7,961 Net chg in cash (a+b+c) 447 342 (841) (837)
(after non-recurring items)
Tax (current + deferred) (525) (424) (563) (1,433)
Net profit 2,579 2,589 4,986 6,528
Key Ratios
Adjusted net profit 2,884 3,784 5,243 6,840 Yr end 31 Mar (%) FY07 FY08 FY09E FY10E
Growth (%) 33.5 31.2 38.6 30.5
EPS (Rs) 6.6 8.6 11.9 15.6
Prior period adjustments (212) (226) 0 0
EPS growth 33.5 31.2 38.6 30.5
Minority interests 242 212 257 312
Book NAV/share (Rs) 34.1 51.0 61.8 75.7
Net income 2,608 2,575 5,243 6,840
Dividend/share (Rs) 0.5 1.0 1.2 1.4
Dividend pay out 8.9 13.6 11.5 10.3
Balance Sheet Tax rate 16.9 14.1 10.1 18.0
EBITDA margin 23.1 18.9 18.7 19.2
Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E
EBIT margin 18.3 16.6 16.7 17.3
Cash & Marketable Securities 4,604 4,946 4,104 3,267 RoCE 13.8 15.7 19.1 19.4
Other current assets 20,565 23,635 39,538 46,425 Net debt/Equity 99.9 47.9 58.8 42.4
Investments 3,910 7,570 7,570 7,570
Net fixed assets 18,736 15,993 17,877 16,729 Valuations
Other non-current assets 22 563 563 563
Yr end 31 Mar (x) FY07 FY08 FY09E FY10E
Total assets 47,837 52,706 69,652 74,554
PER 17.4 13.3 9.6 7.4
Current liabilities 12,504 13,473 21,297 22,761 PCE 11.1 9.5 7.3 5.9
Total Debt 19,592 15,683 20,083 17,383 Price/Book 3.4 2.2 1.9 1.5
Yield (%) 0.4 0.9 1.0 1.2
Other non-current liabilities 744 1,116 1,116 1,116
EV/Net sales 2.8 1.7 1.3 1.2
Total liabilities 32,841 30,271 42,496 41,260
EV/EBITDA 11.6 8.7 6.9 5.8

Share capital 375 439 439 439

Du Pont Analysis – ROE
Reserves & surplus 14,579 21,940 26,662 32,800
Less: Misc. expenditure (7) (5) (5) (5) Yr end 31 Mar (x) FY07 FY08 FY09E FY10E
Shareholders’ funds 14,947 22,375 27,097 33,235 Net margin (%) 12.5 10.8 10.5 12.2
Minorities interests 49 60 60 60 Asset turnover 0.6 0.7 0.8 0.8
Total equity & liabilities47,837 52,706 69,652 74,554 Leverage factor 2.9 2.7 2.5 2.4
Capital Employed 35,333 39,233 48,355 51,793 Return on equity (%) 20.8 20.2 21.1 22.6

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UPDATE Advanta India Maintain Outperformer

Share Data Emerging global seed company

Market Cap. Rs 7.9 bn (US$ 162 mn)
Advanta India, the global seed play with operations in Thailand, Argentina and Australia
besides India, has been expanding to newer countries like the US, since CY06.
Price Rs 468
Emulating its parents’ strategy, it is growing through a mix of organic and inorganic
Target Price Rs 521
opportunities. With four acquisitions already in India, the US and Australia, the company
BSE Sensex 10,967 is looking forward to acquiring other players in corn, sunflower and sorghum in the
Reuters ADVI.BO US and south East Asia. Advanta has entered the GM platform through licence
Bloomberg ADV IN agreements with Monsanto in corn and canola. With SUNSAT (trans-fat-free oil) set
for launch in CY09, Advanta is all set for exciting growth in the future.
6m avg. daily turnover (US$ mn) 0.09
52-week High/Low 1,000/311 Year ending December CY07 CY08P CY09E CY10E CAGR (%)

Issued Shares 16.8 mn P&L Data (Rs mn) (CY08-09E)

Net Sales 4,021 5,844 6,739 7,492 13.2
Valuation Ratios
EBITDA 761 1,135 1,344 1,508 15.3
Yr end 31 Dec CY09E CY10E
Adjusted Net Profit 454 530 600 731 17.4
EPS (Rs) 35.6 43.4 Margins (%)
+/- (%) 13.1 21.9 EBITDA 18.2 18.4 19.0 19.2 –
PER (x) 13.1 10.7 NPM 11.3 9.1 8.9 9.8 –

PBV (x) 1.4 1.3 Balance Sheet Data (Rs mn)

Total Assets 9,822 11,387 12,411 13,297 8.1
Dividend/Yield (%) 0.3 0.4
Shareholders’ Funds 4,533 5,027 5,572 6,253 11.5
EV/Sales (x) 1.6 1.3
Per Share Data (Rs)
EV/EBITDA 7.8 6.6 EPS 27.0 31.5 35.6 43.4 17.4
Shareholding Pattern (%) CEPS 34.3 42.6 48.0 56.5 15.1
Promoters 66 Dividend 1.0 1.0 1.5 2.0 41.4

FIIs 17 Returns (%)

RoE 16.1 11.1 11.3 12.3 –
MFs 9
RoCE 14.9 12.2 13.8 14.9 –
Public & Others 8
• Besides licence agreements with Monsanto for GM corn (Argentina) and canola
Relative performance
(Australia), Advanta plans a similar arrangement in Bt cotton in India too. Through
2,000 its key patented launch, SUNSAT, it plans to sell 2,500 litres of oil (an ~US$ 5 mn
1,500 market) in CY09.
1,000 • Creating the base for its bio-energy project, it acquired a key sorghum business in
500 US and plans further acquisitions in Central America for bio-energy. It has become
the third largest player in vegetable seeds in India, through acquisition of Unicorn
0
and Golden Seeds. Having acquired LongReach (in wheat research) in Australia,
Jul-07
Nov-07
Feb-08

Sep-08
May-08

Dec-08
Apr-07

Apr-09

Advanta is looking at tapping opportunity in hybrid wheat.

Advanta India Ltd • At the current market price of Rs 468, the stock trades at 13.1x and 10.7x CY09E
(Actual)
Sens ex and CY10E earnings of Rs 35.6 and Rs 43.4, respectively. We maintain
Outperformer rating on the stock, with a target price of Rs 521 (12% upside).

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Investment arguments
Strong technology base
Along with being a pioneer in India for hybrid mustard, it has also been a pioneer in
hybrid sunflower seeds, which produce trans-fat-free oil. Having acquired the
technology from CSIR (Spain), Advanta has modified the technology through
indigenous research using molecular marker technology, to produce special sunflower
hybrid seeds with healthier oil content. Also, with better hybrid corn seeds, Advanta
has become a leader in sweet and baby corn seed sales in Thailand. Having acquired
LongReach Plant Breeders in Australia, in which Syngenta holds 30%, Advanta now
has access to a superior research platform for wheat. Further, Advanta is in the process
of improving its research capabilities in India. The company has signed an agreement
with Arcadia Biosciences to develop nitrogen use efficient and salt tolerant sorghum
seeds. The agreement assures Advanta for exclusive global rights to the use of Arcadia’s
NUE technology in sorghum. Arcadia receives an upfront payment, milestone
payments and a share of commercial sales. The company is planning to spend ~10%
of the revenue for R&D. With a strong research base Advanta is all set to tap the
potential growth of the seeds market globally.

Global play in seeds – hedged against seasonal fluctuations

Advanta India is the only listed Indian MNC in the seeds business. With operations
spread across Australia, Argentina, Thailand and the US, as well as India, it is able to
mitigate its biggest risk i.e. the risk from seasonal and weather fluctuations. It has a
market share of 80% in Thailand in the sweet corn segment. In Australia, it is among
the leading suppliers of canola, wheat and sorghum seeds. Having recently acquired
a sorghum business in the US, the company will be able to tap greater revenue in the
March quarter, too, which is generally a lean quarter. Also, Advanta and UPL have
been able to successfully leverage each other’s global distribution network.

Geographic revenue break-up Crop-wise revenue break-up Cropping seasons

11% 10% Country Cropping season
5% 30%
15% India April - September
5%
40%
Australia October - December

Argentina July - December

17%
13% Thailand April - September
23%
10%
21%
Sorghum Sunflower
Aus tralia India Vegetables Corn
Thailand Argentina Canola Rice
USA Others

Source: Company

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SUNSAT – patented launch in CY09

Advanta has been foreseeing growth from new segments as well. With its premier
product, SUNSAT, it aims to tap the first mover advantage in the trans-fat-free oil
segment through hybrid sunflower seeds. Advanta is planning to launch its pioneer
product, Nutrisun trans-fat-free oil from sunflower seeds, in CY09 in Europe and
India, followed by the US and Ukrainian launches. Margarines, chocolate,
confectionaries and ice-cream are the target segments for this semi-solid oil product.
This product has an estimated market of US$ 1 bn, which will be explored over 10
years until 2017. Commercialisation of the product, through retail tie-ups like SA
Team in Columbia and Calsa (subsidiary of UK retail major, Associated British Foods)
has been undertaken. With a new stream of revenue (US$ 1 bn) yet to be explored,
this product is expected to unleash Advanta a new growth trajectory in the future.

Aggressive growth plans

Advanta has been growing through a mix of organic and inorganic opportunities like
its parent UPL. The company has aggressive plans to expand its rice, sunflower,
sorghum, canola and corn segments. In sync with government plans, it has formed a
strategy to explore the growth in the rice segment in India. To double its market share
(less than10% presently) in the rice segment (Rs 2 bn market) by 2015, it plans to
leverage the demand arising from states like UP, Jharkhand, Bihar and Chhattisgarh. It
has obtained new registration for new hybrid rice products in Indonesia and Vietnam.
Under a licence from Monsanto, it has ventured into GM corn in Argentina. Maintaining
its lead in the corn segments in Thailand, it introduced two new products in Thailand,
which helped to acquire 5% additional market share. Having acquired a licence from
Monsanto, Advanta launched GM canola in Australia. With the seeds sector seeing
growth of 15-20%, Advanta looks equipped to tap this exciting opportunity.
Crop-wise growth plans
Crop Growth plans

Sorghum - Bio energy initiative launched with sweet sorghum- Entry into US markets through to Garrison & Townsend
acquisition- Agreement with Arcadia to develop NUE sorghum variety

Sunflower - Developing patent product ‘Nutrisun’

Corn - Obtains registration for two new hybrids each in Indonesia and Brazil- Introduction of BT corn in Argentina

Canola - Licensed GM technology from Monsanto and launched RR canola in Australia

Rice - Two well accepted hybrid varieties in India. Three new hybrids launched in 2008- Registration trials initiated in
Indonesia, Philippines, Bangladesh, Burma and Pakistan- Research facilities established in Vietnam and Indonesia

Hybrid mustard - Launched in India

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Inorganic opportunities to drive growth

Coupled with organic growth, inorganic opportunities have shaped Advanta’s growth
story too. Its recent acquisition of Garrison and Townsend, a primary player in
sorghum, highlights its penchant for exploring the potential use of sorghum for ethanol.
With its LongReach acquisition in Australia, it plans to strengthen revenue from the
wheat segment too. Also, new acquisitions, Golden Seeds and Unicorn, in the vegetable
seeds space, will give a fillip to future margins. Advanta intends to acquire companies
in the sunflower, corn and sorghum space of size ~US$ 25-50 mn in the future too.

Key acquisitions
Year Company Country Crop

June 2007 Golden Seeds India Vegetables

November 2007 Longreach Australia Wheat

January 2008 Unicorn India Vegetables

March 2008 Garrison Townsend USA Sorghum

June 2008 Limagrain (Sunflower business) USA Sunflower

Advanta moves into sale of genetically modified seeds – seeds of

the next generation
With a growing global food shortage, GMO seeds will become indispensable. To tap
demand from this growing segment, Advanta has licensed GM technology for corn,
canola and cotton from Monsanto in the Argentinean, Australian and the Indian
regions, respectively. Advanta has also been distributing Bt cotton seeds for companies
like Rasi and Nuziveedu in India. Advanta’s proactive move to enter GM seeds gives
it an edge over peers by strengthening its future product portfolio. With the growing
need for GM seeds in the future, GMOs will form a significant part of the revenue
stream for Advanta.

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Investment concerns
Negligible presence in US and European markets
The US and European markets are the biggest markets for seeds in the world, with a
combined share of 43%. March being the peak season of the European and US
revenue stream, they will provide much needed stability to the cyclical earnings of the
Indian seed company. Absence of a significant presence in these strategically important
markets is an opportunity lost for Advanta. However, the new acquisition of Garrison
and Townsend (US$ 440 mn revenue) and Limagrain in America provides some solace.
Besides the launch of SUNSAT in Europe in CY10, would open new opportunities
for Advanta in future.

Risk from currency fluctuations

Though Advanta has a geographically diversified portfolio which de-risks its revenue
from climatic risks, it exposes the company to currency related risks. With growing
uncertainty in the global financial markets, companies with huge international exposure
(Advanta gets 75% of revenue from international markets) stand to lose unless
strategically hedged. Though the company has entered into hedging contracts for
future sales, it has an unhedged exposure primarily on account of a euro loan worth
EUR 13.6 mn which carry an interest rate of LIBOR+2.5% p.a.

Inorganic path to growth – integration issues

Advanta has been following a mix of organic and inorganic opportunities, like its
parents UPL. With five acquisitions already (Golden Seeds (India), Unicorn Seeds
(India), Garrison and Townsend (US), LongReach Plant Breeders (Australia) and
Limagrain (US)) and two more planned, Advanta may end up tackling integration
issues and possible inconsistencies in standards and cultures. Advanta, too, may be
affected on the margin front like its parent UPL (which has seen a fall in margins from
23% to 19% due to integration of the Cerexagri acquisition). The risk to earnings due
to integration issues may affect margins and our future earnings estimate to some
extent.

Risks related to weather, disease and pests

All agribusinesses are dependant on optimal weather conditions for positive revenue
streams. Given that Advanta has a geographically diversified revenue mix, the company
is to some extent insulated against weather fluctuations. Nevertheless, the onset of
global warming is the upcoming challenge for all companies in the agri-sector.

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Valuations
The introduction of GM technology and adoption of hybrid seeds have triggered a
growth of 15-20% in the Indian seeds sector. Advanta has been growing through a
mix of organic (introduction of new hybrids and GM products) and inorganic
opportunities. We see Advanta’s earnings growing at a CAGR 17% over CY08-10E.
Considering the good growth in the seeds sector, Advanta’s growth potential, its
global reach, and the valuation of its global peers, we have valued Advanta at 12x
CY09E earnings of Rs 43.4. We have arrived at a price of Rs 521.

Advanta has been growing through a mix of research based opportunities and key
acquisitions in the vegetable seeds, sorghum, wheat and sunflower segments. Advanta’s
launch pipeline for the future includes high yielding corn, GM canola, GM cotton,
wheat hybrids and confectionery sunflower among others. As well as 2,500 tonnes of
Nutrisun oil set to be sold by 2009, we see Advanta kick start its bio-energy project
backed up by sorghum as well. Advanta is in advanced talks with research companies
for development of GM products in sunflower, sorghum and corn. With the global
presence, niche crop focus, and strong research capabilities Advanta is positioning
itself to tap the growth opportunities. However, the fall the prices of crops
internationally, funding towards product development and limitations in inorganic
opportunities, Advanta growth rate will fall inline to the industry growth rate. With
average earnings CAGR of 17%, we remain positive on Advanta. We maintain
Outperformer.
PER Band EV/EBITDA
2,200 2,500 30.2x
2,000 52.0x
1,800 2,000 25.2x
43.4x
1,600
1,400 1,500 20.2x
34.9x
1,200 15.2x
1,000 26.3x 1,000
800 10.2x
17.7x
600 500
5.2x
400
200 0
Jun-07

Oct-07
Dec-07
Feb-08

Jun-08

Oct-08
Dec-08
Feb-09

Jun-07

Oct-07
Dec-07
Feb-08

Jun-08

Oct-08
Dec-08
Feb-09
Apr-07

Aug-07

Apr-08

Aug-08

Apr-09

Apr-07

Aug-07

Apr-08

Aug-08

Apr-09

Source: B&K research

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Company background
Advanta India is in the business of research, production and sale of hybrid seeds. It
has hedged a large part of its earnings through its geographic diversity and a strategic
product mix (it also sells drought resistant crops like sorghum). Advanta’s crop portfolio
includes sorghum, cotton, canola, sunflower, corn, rice and mustard. Advanta also
sells GM varieties of corn and canola through licence from Monsanto and is also
planning the same arrangement for cotton in India. Besides presence in Thailand,
Australia, Argentina and India, Advanta has been expanding into the US and Europe,
which form 42% of the world crop market. Through the Bio-energy project in US and
SUNSAT project in Europe, Advanta has slowly been setting up its base in the West.

Management
Advanta had been acquired by United Phosphorus Limited and was later listed
independently by UPL, after which it holds 49.9% shareholding Advanta. Presently,
Advanta is managed by Mr V. R. Kaundinya, the CEO and MD and other directors,
along with Mr Manoj Gupta the Group CFO. Being headed by the Shroffs, Advanta
India, like UPL, follows a mix strategy which includes organic and inorganic
opportunities. Advanta has acquired five companies so far, and is looking for further
acquisitions in the corn, sunflower and sorghum space in the future.

Geography based product profile

Geographic region Crop profile

Advanta India Rice, sunflower, corn, cotton, hybrid mustard

Advanta Argentina Sunflower, corn, sorghum

Pacific Seeds Australia Wheat, sorghum, sunflower, corn, canola

Pacific Seeds Thailand Sweet corn, baby corn, field corn, grains, sorghum, sunflower

India
Headquartered in India, Advanta has a market share of around 8-10% in its key crop
segments of rice, sunflower and corn. The Indian region contributes to 24% of total
revenue. Advanta was the first to introduce hybrid mustard in India last year. Besides
good growth seen in its rice and corn portfolio in India, it plans to enter the indigenous

Rice and hybrid mustard are research of Bt cotton in India, soon. Having acquired Golden Seeds and Unicorn it is
the future growth drivers in among the top five vegetable seed providers in India. Advanta plans to shift its
India production unit from Australia to low cost centres in India and China in the near
future. With relatively higher margins of 18% from the Indian region, an expansion
here would lead to better earnings for Advanta in future. With the growing food
shortage, we see the Indian region growing at 20% in the future.

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Australia
RR canola to be the key The Australian region contributes to around 26% of Advanta’s consolidated revenue.
growth driver in Australia The Australian market has reached saturation and sees an average growth of around
5%. Advanta has been planning to shift production from Australia to lower cost
centres like India and China. Having acquired a wheat research business, LongReach,
and GM canola licence from Monsanto, the Australian region will see good revenue
growth over the next two-three years.

Argentina
Introduction of GM corn is Argentina contributes to 11% of total revenue for Advanta. Argentina is the key
set to drive revenues in region for Advanta’s sunflower cultivation, especially for its SUNSAT project.
Argentina
Sunflower and sorghum contribute almost 75% of Advanta revenue in Argentina.
Advanta introduced its first GM crop in the region in the corn segment. GM corn now
contributes 10-15% of the region’s revenue. With political issues and the credit period
extended to farmers being the key challenges in this region, we see an average growth
rate of around 10%.

Thailand
The Thailand region generates 12% of Advanta revenue. Advanta is a leader in sweet
corn and baby corn seed sales in Thailand with a market share of around 60% in this
segment. Having witnessed diminishing demand for the sweet corn exports from
Thailand to Europe, due to anti-dumping duty imposed on sweet corn by the EU,
Advanta sees greater revenue from field corn in the future. However, with lower
margins of 50% from the field corn business compared to 70% in sweet corn on a
gross basis, we may see margins for this region being affected. Advanta also plans to
introduce hybrids with better yields under heavy rains, in the region. We see this
region growing at and average rate of 10% in the future.

SUNSAT (Nutrisun)
SUNSAT is trans-fat-free oil made from non-GM hybrids of research-based sunflower.
Nutrisun would be HSHO oil i.e. high on stearic acid and high on oleic acid. Its stearic
content will help its usage in snacks as a semi-solid oil and its high oleic content makes
it nutritious (reduces bad cholesterol (LDL) and neutral to good cholesterol (HDL)).

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Nutrisun – product positioning

Saturated Monounsaturated Poliunsaturated

Palmitic Stearic Oleic Linoleic Linoleic

16:0 18:0 18:1 18:2 18:3

Stable Unstable

Increase LDL Decrease LDL

Solid Liquid

Stable and Healthy

Source: Company

Segments targeted
Advanta has been aiming to launch Nutrisun in the cocoa butter, ice-cream, frying oil,
margarine and spreads, bakery, and biscuits markets. We have assumed it acquires an
average market share of 5% in the first year of launch, which would increase
subsequently in the future.
The following are the segments targeted by Advanta (by 2016)
Segments Total market Nutrisun-Targeted Targeted market

targeted (’000 tn/year) market by 2016 share (%)

(’000 tn/year)

CBE(Cocoa Butter
600 50 8
equivalents)+CCF

Ice Cream 1,000 40 4

Frying oil 10,000 140 1

Margarines/spreads 1,200 400 33

Bakery 10,000
200 2
Biscuits 1,000

Total 23,800 830 Avg-10%

Source: Company

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Commercialisation
Advanta plans to launch Nutrisun in the European and Indian markets in CY09. The
major areas targeted for sunflower seed production are Argentina, US, Ukraine and
India. Patents have been filed for each of these regions. Advanta will be entering into
joint ventures with major players in the food processing industry for future sales.
Advanta has signed independent MOU’s with Team SA (one of the leading oil and fats
companies in Columbia and Latin America) and Calsa (a subsidiary of the UK retail
major, Associated British Foods, ABF, (revenue US$ 12 bn)) for further development
of Nutrisun (oil from SUNSAT). However, we still need clarity on the kind of
arrangement Advanta has planned for extraction of oil and its sale. Key competitors
in the market for Advanta are Monsanto (soy oil) and DuPont, which plan to launch
trans-fat-free oil over the next three years in the GM space.
Nutrisun – potential customers
Segment Potential companies targeted

CBE AAK, 101 Loders, Fuji Oil

Ice-cream Nestle, Unilever

Frying McDonalds, McCain, Pepsico

Margarine Unilever

Bakery fats Bimbo, General Mills, Kraft

Biscuits ABF, Gamesa

Nutrisun – pricing
Product Price (US$/tonne)

Cocoa Butter 4,000

Cocoa Butter Equivalents 2,800

(Palm oil + Shea oil)

Shea oil 2000

10% more than the high
Nutrisun 1,540
oleic oil price
High oleic 1,400

Palm oil 880

Regular Sunflower 880

Source: Company (as of 2007)

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Advanta India

Income Statement Cash Flow Statement

Yr end 31 Dec (Rs mn) CY07 CY08 CY09E CY10E Yr end 31 Dec (Rs mn) CY07 CY08P CY09E CY10E

Net sales 4,021 5,844 6,739 7,492 Pre-tax profit 594 580 766 937
Growth (%) 5.3 45.3 15.3 11.2 Depreciation 99 188 208 220
Chg in working capital (1,448) 199 (199) (158)
Operating expenses (3,423) (5,040) (5,732) (6,358)
Total tax paid (254) 66 (238) (293)
Operating profit 599 804 1,007 1,134
Cash flow from oper. (a) (1,009) 1,033 538 707
Other operating income 163 331 337 374 Capital expenditure (1,371) (1,264) (300) (210)
EBITDA 761 1,135 1,344 1,508 Chg in investments (5) 0 0 5
Growth (%) 2.1 49.1 18.4 12.2 Cash flow from inv. (b) (1,376) (1,264) (300) (205)
Depreciation (123) (188) (208) (220) Free cash flow (a+b) (2,384) (231) 238 502
Other income 363 58 89 108 Equity raised/(repaid) 3,064 0 0 0
Chg in minorities 23 17 25 16
EBIT 1,002 1,006 1,225 1,395
Debt raised/(repaid) (1,313) 300 0 (100)
Interest paid (408) (425) (458) (458)
Dividend (incl. tax) (20) (20) (20) (30)
Pre-tax profit 594 580 766 937 Other financing activities (65) (16) (25) (10)
(before non-recurring items) Cash flow from fin. (c) 1,689 281 (20) (124)
Pre-tax profit 594 580 766 937 Net chg in cash (a+b+c) (696) 50 219 378
(after non-recurring items)
Tax (current + deferred) (148) (66) (192) (236)
Key Ratios
Net profit 446 514 575 701
Prior period adjustments (9) (25) 0 0 Yr end 31 Dec (%) CY07 CY08P CY09E CY10E
Minority interests 8 17 25 30 EPS (Rs) 27.0 31.5 35.6 43.4
Net income 445 505 600 731 EPS growth 13.9 16.9 13.1 21.9
Adjusted net profit 454 530 600 731 Book NAV/share (Rs) 270.1 299.4 331.8 371.4
Growth (%) 13.9 16.9 13.1 21.9 Dividend/share (Rs) 1.0 1.0 1.5 2.0
Dividend pay out 4.3 3.7 4.9 5.4
Tax rate 25.0 11.4 25.0 25.2
Balance Sheet EBITDA margin 18.2 18.4 19.0 19.2
EBIT margin 24.9 17.2 18.2 18.6
Yr end 31 Dec (Rs mn) CY07 CY08P CY09E CY10E
RoCE 14.9 12.2 13.8 14.9
Cash 563 612 831 1,208 Net debt/Equity 57.3 56.7 47.2 34.6
Other current assets 3,784 4,355 5,070 5,593
Investments 5 5 5 0 Valuations
Net fixed assets 5,222 6,299 6,390 6,380
Yr end 31 Dec (x) CY07 CY08P CY09E CY10E
Other non-current assets 248 116 116 116
Total assets 9,822 11,387 12,411 13,297 PER 17.4 14.8 13.1 10.8
PCE 13.6 11.0 9.7 8.3
Current liabilities 1,997 2,767 3,292 3,669 Price/Book 1.7 1.6 1.4 1.3
Yield (%) 0.2 0.2 0.3 0.4
Total Debt 3,170 3,470 3,470 3,370
EV/Net sales 2.6 1.8 1.6 1.3
Other non-current liabilities 109 109 63 6
EV/EBITDA 13.8 9.5 7.8 6.7
Total liabilities 5,275 6,345 6,825 7,044

Share capital 168 168 168 168

Du Pont Analysis – ROE
Reserves & surplus 4,364 4,858 5,404 6,085 Yr end 31 Dec (x) CY07 CY08P CY09E CY10E
Shareholders’ funds 4,533 5,027 5,572 6,253 Net margin (%) 11.3 9.1 8.9 9.8
Minorities interests 14 14 14 0 Asset turnover 0.5 0.6 0.6 0.6
Total equity & liabilities 9,822 11,387 12,411 13,297 Leverage factor 2.9 2.2 2.2 2.2
Capital employed 7,811 8,605 9,105 9,628 Return on equity (%) 16.1 11.1 11.3 12.3

AGROCHEMICALS AND SEEDS 96

 B&K RESEARCH APRIL 2009

UPDATE Kaveri Seed Maintain Outperformer

Share Data Small player, high growth opportunities

Market Cap. Rs 2.3 bn (US$ 42.3 mn)
Kaveri Seed is a small but growing player in India with niche presence in South India,
in the corn and sunflower business. The company is now looking forward for growth
Price Rs 168
through expanding geographic presence to North India and hybrid rice.
Target Price Rs 197

BSE Sensex 10,967 Year ending March FY07 FY08 FY09E FY10E CAGR (%)
P&L Data (Rs mn) (FY08-10E)
Reuters KVRI.BO
Revenues 658 966 1,179 1,446 22.3
Bloomberg KSCL IN
EBITDA 171 254 283 390 24.1
6m avg. daily turnover (US$ mn) 0.10
Reported PAT 105 140 228 301 46.8
52-week High/Low 319/111 Margins(%)
Issued Shares 13.7 mn EBITDA 26.0 26.3 24.0 27.0 –
Valuation Ratios Net Profit Margin 16.0 16.4 19.8 20.8 –

Yr to 31 Mar FY09E FY10E Balance Sheet Data (Rs mn)

Total Assets 672 1,519 1,827 2,242 21.5
EPS (Rs) 17.0 21.9
Shareholders’ Funds 263 1,053 1,283 1,584 22.7
+/- (%) 47.8 28.7
Per Share Data (Rs)
PER (x) 9.9 7.7
Reported EPS 7.7 10.2 16.6 21.9 38.4
PBV (x) 1.8 1.5 Adjusted EPS 7.7 11.5 17.0 21.9 37.9
EV/Sales (x) 2.0 1.6 Cash EPS 8.6 13.0 19.3 26.6 37.0
EV/EBITDA 8.1 6.0 Returns (%)
RoCE 57.5 34.1 22.2 23.3 –
Shareholding Pattern (%)
RoE 62.4 24.0 20.0 21.0 –
Promoters 61

FIIs 3 • Kaveri is a niche player in the corn and sunflower segments with 42% and 19% of
revenue from each crop, respectively. To tap the first mover advantage, Kaveri
MFs 14
launched virus-resistant sunflower (potential market Rs 300 mn) in the coming
Public & Others 22
season.
Relative performance
• Having received approval for Bt cotton sales in 2007, Kaveri plans an aggressive
400
expansion in revenue from cotton seed sales from Rs 80 mn in FY08 to Rs 500 mn
350
300 in FY10.
250
200 • Though Kaveri is a small company, it has strong earnings growth potential of 47%
150 CAGR over FY08-10E on the back of its expansion plans. The company is also
100
50 contemplating opportunities in seed exports to the neighbouring countries. At the
0 current market price of Rs 168, the stock trades at 9.9x and 7.7x FY09E and
Oct-07

Jan-08

Jul-08

Oct-08

Jan-09
Apr-08

Apr-09

FY10E earnings of Rs 17.0 and Rs 21.9, respectively. We maintain our

Kaveri Seeds Co (Actual)

Outperformer rating on the stock, with the target price of Rs 197 (17% upside).
Sens ex

AGROCHEMICALS AND SEEDS 97

 B&K RESEARCH APRIL 2009

Investment arguments
Niche player in the corn and sunflower segments
Kaveri Seed gets 38% of its total revenue from the corn segment and 18% from
sunflower crops. The company has a niche presence (less than 10% market share) in the
corn and sunflower markets of Maharashtra, Andhra Pradesh and Karnataka states.
Kaveri competes with Monsanto and Pioneer in corn crops in India. Besides launching
two to three new hybrids in corn, Kaveri plans to scale-up revenue from its existing corn
variety, Kaveri 50, too (with margins of 60%). Kaveri’s business in this segment will see
an average growth of 15% annually. With incremental demand for corn in poultry,
acreage under corn is expected to remain stable (while during Kharif 2007 corn acreage
was up 9%). With only 50% of hybridisation, we see huge potential waiting to be tapped
in the corn seed business in India. Kaveri’s portfolio is rightly positioned to explore this
Total revenue FY08 Rs 966 mn vast market which is seeing an annual growth of more than 10%.
11%
5% 0% 38% Kaveri Seed’s business opportunity
0%
10%
Crop Total market Kaveri Seeds

Size Hybridisation Revenue Growth potential

10%
8% 18% (Rs bn) (%) (Rs mn) (%)
Corn Sunflower Corn 5.5 50 370 25
Paddy Cotton
Bajra Sorghum
Others Vegetable Seeds Sunflower 2.5 70 170 10
Micronutrients
Bt Cotton 13.6 100 140 20
Source: Company
In the sunflower crop, too, Kaveri sees growth opportunity. Due to viral diseases in
the sunflower crop, farmers have been shifting cultivation to alternative crops.
Sunflower acreage dropped from 2.3 mn ha in 2006 to 1.8 mn ha in 2008. Kaveri has
conducted advance stage trials for virus-resistant varieties in sunflower, which it is has
launched in the Kharif season of 2008. We see an initial revenue inflow of ~Rs 100
mn for FY10E, from this new launch. With its aggressive expansion plans to gain
presence in northern India and its thrust on corn and sunflower, we see Kaveri unleash
growth in revenue of 22% CAGR over FY08-10E.

Strong technology platform

With more than a decade of experience in crop research, Kaveri has been able to
build a credible germplasm in corn, sunflower and cotton crops. Compared to a new
player, which would require a minimum research of six to nine years, Kaveri, with
already-established research facilities, will be able to tap the market with two to three
product launches in each crop segment every year. Kaveri spends around 5% of its
sales on research. It has already received permission for its Bt cotton varieties and
also introduced a pioneering product in sunflower (virus-resistant varieties with Rs
300 mn market opportunity).

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B&K RESEARCH APRIL 2009

Kaveri’s research-based products

Crops (Rs mn) Products Total market size (Rs mn)

Sunflower virus resistant varieties 2,520

Corn Kaveri 50 & drought resistant corn 5,538

Cotton Bt cotton (BG II) 13,575

Micronutrients & Trichoderma viride and 400

Bio-pesticides Trichoderma Hazarinum

Kaveri’s experience is useful, particularly now, when it plans to expand to North India
(where it has already established good contacts with distributors) and overseas. With
aggressive marketing and a strong research platform, Kaveri, competing with Monsanto
and Syngenta, in the corn and sunflower markets, will be able to beat a large segment
of the local competition. In a market with huge entry barriers, Kaveri, backed with a
strong germbank, has been able to carve a niche for itself and is well equipped to
expand its business at a 22% CAGR over the FY08-10E period.

Strong product launch pipeline

Backed by incremental demand for hybrid seeds and an equipped germplasm collection
(established for more than a decade), Kaveri plans to introduce two to three new
products each in the corn, sunflower and rice segments in the future. Having received
permission for Bt cotton last year, it plans to scale up its cotton business five times
from Rs 80 mn (100,000 packets) in FY08 to Rs 400 mn (600,000 packets) in FY10. In
the sunflower segment, the launch of its new virus-resistant varieties will help tap an
additional market opportunity of Rs 300 mn by FY10. It also plans to expand its
vegetable seed business four times to Rs 2 mn by FY10. With the upgrade of existing
plants already underway, Kaveri plans to increase its seed processing capacity from
18,000 tonnes to 30,000 tonnes in 2009.

Key Events/triggers for Kaveri

Crop Plans

Cotton Expansion in BT cotton (BG-II)

Sunflower Virus-resistant sunflower hybrids

Rice Hybrid rice

Besides the seeds business, expansion of the micronutrient business has also been in
progress. Having doubled its revenue from the sale of micronutrients in FY08 from
Rs 40 mn to Rs 110 mn, Kaveri is targeting revenue of Rs 150 mn by FY10 from this
segment. With the management’s ambitious plans to develop business aggressively
through key product launches, we believe Kaveri is expanding its presence at the right
time in India, with its niche presence in corn, cotton and sunflower giving it significant
leverage to play.

AGROCHEMICALS AND SEEDS 99

B&K RESEARCH APRIL 2009

Key concerns
Market share of less than 5% – a small player
Kaveri is a small player in the Indian seeds market with a market share of less than 5%.
In a market as huge as US$ 1 bn (Rs 40 bn), it generates revenue of just Rs 658 mn.
Even in its niche areas of corn and sunflower it has a market share of less than 10%.
Though it has elaborate expansion plans, Kaveri’s research capabilities still lag its Key
MNC competitors like Monsanto, Pioneer, Syngenta, etc. Kaveri still has to travel a
long way to become equally competent to the leading players in the industry.

Investment in equity funds

Kaveri had invested ~ Rs 40 mn in equity mutual funds and ~Rs 20 mn in the equity
shares of Vjay Textiles, at the end of FY08. With the fall in the equity market, these
investments have seen substantial erosion in value, leading to the provisioning of Rs
30 mn in FY08 and Rs 15 mn 9MFY09. Thus the riskier investment decision taken by
the management has lead to erosion in the shareholders cash.

Agribusiness subject to climatic risks

Unlike players like Advanta, which have a worldwide presence, Kaveri is limited to
just one subcontinent. With presence in India alone, Kaveri runs the risk of uncertain
business revenue due to erratic weather conditions. Furthermore, it does more than
50% of its business in the June quarter. The climatic risk inherent to agribusinesses
can be minimised only through geographical portfolio expansion. Kaveri is planning
for overseas expansion through alliances and exports, to allay revenue uncertainty to
some extent.

AGROCHEMICALS AND SEEDS 100

 B&K RESEARCH APRIL 2009

Valuations
Indian seed market players have been witnessing double-digit growth in revenue in
recent times. Rising demand for better seeds and farm inputs has brightened the
growth prospects of the seed sector in India.

Kaveri Seed, a provider of seeds and micronutrients, is a small but growing player in
the agri space. From being a niche play in corn and sunflower in Karnataka and
Andhra Pradesh, expansion into northern India and overseas (through exports and
overseas alliances) and entry into newer crop segments are on the radar for Kaveri.
Key growth triggers for Kaveri over the next two years include multiplying Bt cotton
seeds sales, expanding the micronutrients business, introducing new products in corn
and sunflower and the foray into the global markets (through acquisitions and exports).
We see earnings CAGR of 38% over the FY08-10E period.

PER Band EV/EBITDA

700 700
29.5x 21.8x
600 600
24.2x 17.9x
500 500
18.9x 14.1x
400 400
300 13.5x 300 10.3x

200 8.2x 200 6.5x

100 100 2.6x
0 0
Oct-07

Nov-07

Jan-08

Mar-08

May-08

Jun-08

Oct-08

Nov-08

Jan-09

Mar-09

Oct-07

Nov-07

Jan-08

Mar-08

May-08

Jun-08

Oct-08

Nov-08

Jan-09

Mar-09
Aug-08

Aug-08
Source: B&K research

In India, Advanta India and Kaveri Seed are direct competitors. Advanta, with its
global business and patented products like Sunsat, generally trades at a higher premium
(trades at 12x CY10E).

Though current fundamentals of Kaveri Seed appear to be strong, entry into new
crop segments like cotton, and new regions like North India, will be challenging. At the
current market price of Rs 168, the stock trades at 9.9x and 7.7x FY09E and FY10E
earnings of Rs 17.0 and Rs 21.9, respectively. We maintain our Outperformer rating
on the stock, with the target price of Rs 197 (9x FY10E).

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B&K RESEARCH APRIL 2009

Company background
Kaveri Seed Company Limited is a family-run business which is in the research,
production, processing and marketing of hybrid seeds. Based in Hyderabad, it is one
of the leading players in the corn and sunflower segments in South India. Having
acquired Kaveri Agriteck, the company has forayed into the bio-pesticides and bio-
fertilisers as well. With revenue of over Rs 1 bn, it is a niche player. Presently it gets
50% of its revenue from Andhra Pradesh and Karnataka, primarily from the sale of
corn and sunflower seeds.

Business structure

Kaveri Seed Company

Limited

Kaveri Agriteck Growmore farms

Kaveri Seed
(Bio-fertilisers (Earlier, a supplier of
(Field crops and vegetable
& foundation seeds to Kaveri.
crops)
Bio-pesticides) Now merged with Kaveri Seed)

Business strategy
Kaveri plans to scale up its business to gain a greater presence in the Indian seed
market. Besides establishing a pan-India presence, it has plans for overseas expansion
too. The key strategic path adopted by Kaveri is:

1. Expansion into the North.

2. Expansion into new crop segments like Bt cotton, hybrid rice and mustard.

3. Acquisition of farmland in Hyderabad and Karnataka.

4. Adoption of inorganic route to expand overseas.

5. Entering global markets through exports.

Segment mix
Kaveri Seed derive its revenue from three key segments:

I. Field crops.

II. Vegetable crops.

III. Micronutrients.

Field crops
Kaveri operates in a niche set of crops. Corn and sunflower are its primary crops
contributing to more than 56% to their revenue, until now. However, their present
portfolio also includes cotton, as well other crops like bajra (pearl millet), jowar

AGROCHEMICALS AND SEEDS 102

B&K RESEARCH APRIL 2009

(sorghum) and rice. They are among the leaders in providing corn and sunflower seeds in
the three regions of Maharashtra, Karnataka and Andhra Pradesh. Having received
permission to sell Bt cotton last year, Kaveri is expecting this crop to complement their
future growth. Products in the pipeline for research include higher yielding hybrids of rice
and mustard, besides ongoing research on corn, sunflower, bajra and sorghum products.

Revenue contribution

100
80
60
%

40
20
0
FY04 FY05 FY06 FY07 FY08 FY09E FY10E
corn s unflower rice/paddy
cotton bajra/pearl millet others
micronutrients

Source: Company, B&K Research

Corn
Corn contributed to 38% of Kaveri’s revenue in FY08. Kaveri operates only in niche
areas of Karnataka and Andhra Pradesh. Kaveri’s corn seed variety, Kaveri 50, is well
recognised variety among farmers. With an estimate of Rs 400 mn of revenue from corn
in the current year, Kaveri will see a 15-18% sustainable growth. Given Kaveri’s growing
cotton segment, we see corn contribution to revenue to be around 30% in the future.

Sunflower
Kaveri obtains around 18% of its revenue from the sale of sunflower seeds. Kaveri
plans to introduce two to three new hybrids of sunflower in the coming two years.
The increasing problem of pests in sunflower has dissuaded farmers from taking
sunflower cultivation. In first-of-its-kind research, Kaveri Seed has been looking for
pest-resistant hybrids in sunflower, which can become a key growth driver in the next
three to four years, with contribution to revenue of around Rs 300 mn. Kaveri sees its
revenue from the sunflower segment growing at 10-15% in the next two years from
Rs 170 mn in FY08 to around Rs 621 mn by FY10.

Cotton
Having received approval for the sale of its Bt cotton hybrids, Kaveri had sold around
154,000 packets of Bt cotton seed, in FY08. The price of cotton seeds is regulated by the
government at Rs 750/ packet (the price of cotton packets has been coming down over
the years). Kaveri is looking to scale the sale of Bt cotton seeds by five times to 750,000
packets in FY10. This will be the key driver of revenue for Kaveri Seed in the future.

AGROCHEMICALS AND SEEDS 103

B&K RESEARCH APRIL 2009

The key concern, however, is that Kaveri still sells Bt1 seeds only, when market leaders,
Nuziveedu and Rasi seeds, have been selling Bt2 in small pockets already. Still being
under research, Kaveri may take another two to three years to commercialise Bt2. In
such a scenario future growth prospects for Kaveri may not be as competitive in
cotton, beyond FY09.

Rice
Rice seeds form 7% of Kaveri’s revenue. Owing to huge demand arising from states
like Bihar, Chhattisgarh and Madhya Pradesh, Kaveri sees this segment growing by
50% this year. Kaveri is in the advance stages of research for slender fine varieties in
the hybrid rice segment. We see a healthy growth of above 25% from this segment in
the future.

Other seeds
Other seed segments include the sale of bajra (pearl millet), jowar (sorghum), soybean
and mustard seeds which form 3% of the seed market and 11% of Kaveri’s portfolio.

Microtek
The Microtek segment caters to the sale of micronutrients and bio-pesticides. Kaveri
sells these products under its Microtek brand name and expects this segment to see an
average growth of 30% in the next three years.

Micronutrients and Bio-pesticides

Micronutrients, namely iron, zinc, manganese, copper, boron, molybdenum and
chlorine are nutrients which are required by plants in trace quantities but are considered
equally important to the plant. As a complete package to the farmer, the sale of seeds
could supplement the sale of micronutrients as well. With the increasing usage of
hybrid seeds (requiring greater nutrients from the soil) and decreasing soil fertility
levels (due to continuous usage of chemicals), industry players see demand for
micronutrients rising by more than 50% in the future. Kaveri sees revenue from this
segment growing by around 30% in the future.

Kaveri also sells bio-pesticides, which, unlike the chemical pesticides, are made from
fungus and bacteria that are naturally present in the soil. Trichoderma viride and
Trichoderma Hazarinum are the two products in Kaveri’s current portfolio. However,
Kaveri earns very minimal revenue (Rs 0.3 mn) from bio-pesticides and has plans to
scale up the segment shortly with the introduction of three to four new products.

Geographic revenue mix

Kaveri receives a major part of its revenue from the niche regions of Maharashtra,
Andhra Pradesh and Karnataka. It has a market share of less than 10% in each of
these states. Kaveri has plans to expand its revenue base to the northern regions of
India to establish a pan-India presence.

AGROCHEMICALS AND SEEDS 104

B&K RESEARCH APRIL 2009

Revenue from Andhra and Karnataka

90
80
70
60
50

%
40
30
20
10
0
FY05 FY06 FY07 FY08 FY09E FY10E

Source: Company, B&K Research

Kaveri is also contemplating an overseas expansion through two routes i.e. overseas
alliances and a foray into exports. It is in an advanced stage of talks with key players
overseas, especially in the vegetable seeds segment, for a strategic alliance or an
acquisition. Plans are at the seed trial stage for exports to countries like Nepal (corn),
Pakistan (rice) and Bangladesh (rice) where it sees a market of around Rs 10 bn.

AGROCHEMICALS AND SEEDS 105

 B&K RESEARCH APRIL 2009

Kaveri Seed

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E

Net sales 658 966 1,179 1,446 Pre-tax profit 159 212 249 329
Growth (%) 36.5 46.8 22.1 22.6 Depreciation 12 19 31 64
Chg in working capital (38) (189) 62 5
Operating expenses (487) (712) (896) (1,055)
Total tax paid (53) (72) (22) (28)
Operating profit 171 254 283 390
Cash flow from oper. (a) 80 (30) 321 369
EBITDA 171 254 283 390
Capital expenditure (128) (178) (456) (403)
Growth (%) 330.4 48.2 11.6 37.9
Chg in investments 0 (232) (8) 0
Depreciation (12) (21) (31) (64) Cash flow from inv. (b) (128) (410) (464) (403)
Other income 15 22 21 22 Free cash flow (a+b) (48) (440) (144) (34)
EBIT 173 255 273 348 Equity raised/(repaid) 105 650 1 0
Interest paid (14) (15) (18) (19) Debt raised/(repaid) (25) (62) 4 4
Pre-tax profit 159 240 255 329 Other financing activities (23) 0 2 0
(before non-recurring items) Cash flow from fin. (c) 58 588 7 4
Non-recurring items 0 (28) (6) 0 Net chg in cash (a+b+c) 10 147 (137) (30)
Tax on non-recurring items 0 10 1 0
Pre-tax profit 159 212 249 329 Key Ratios
(after non-recurring items)
Yr end 31 Mar (%) FY07 FY08 FY09E FY10E
Tax (current + deferred) (54) (72) (21) (28)
EPS (Rs) 7.7 11.5 17.0 21.9
Net profit 105 140 228 301
EPS growth 263.1 49.9 47.8 28.7
Adjusted net profit 105 158 233 301
Book NAV/share (Rs) 19.2 76.8 93.7 115.6
Growth (%) 263.1 49.9 47.8 28.7
Tax rate 33.8 34.2 8.6 8.6
Net income 105 140 228 301 EBITDA margin 26.0 26.3 24.0 27.0
EBIT margin 26.4 26.4 23.1 24.1
Balance Sheet RoCE 57.5 34.1 22.2 23.3
Net debt/Equity 26.9 (13.2) 0.1 2.3
Yr end 31 Mar (Rs mn) FY07 FY08 FY09E FY10E

Current assets 464 919 795 870

Valuations
Investments 0 232 240 240
Yr end 31 Mar (x) FY07 FY08 FY09E FY10E
Net fixed assets 208 367 793 1,132
Total assets 672 1,519 1,827 2,242 PER 21.9 14.6 9.9 7.7
PCE 19.6 12.9 8.7 6.3
Current liabilities 289 408 482 593 Price/Book 8.8 2.2 1.8 1.5
Total Debt 119 57 60 64 Yield (%) 0.0 0.0 0.0 0.0
EV/Net sales 3.6 2.2 2.0 1.6
Other non-current liabilities 1 2 1 1
EV/EBITDA 13.9 8.5 8.1 6.0
Total liabilities 409 466 544 658

Share capital 97 137 137 137

Du Pont Analysis – ROE
Reserves & surplus 170 917 1,146 1,447 Yr end 31 Mar (x) FY07 FY08 FY09E FY10E
Less: Misc. expenditure (4) (1) 0 0 Net margin (%) 16.0 16.4 19.8 20.8
Shareholders’ funds 263 1,053 1,283 1,584 Asset turnover 1.1 0.9 0.7 0.7
Total equity & liabilities 672 1,519 1,827 2,242 Leverage factor 3.4 1.7 1.4 1.4
Capital employed 384 1,111 1,345 1,649 Return on equity (%) 62.4 24.0 20.0 21.0

AGROCHEMICALS AND SEEDS 106

 B&K RESEARCH APRIL 2009

UPDATE Bhagiradha Chemicals and Industries Not Rated

Share Data Exports focussed player

Market Cap. Rs 175 mn (US$ 3.5 mn) Bhagiradha Chemicals and Industries is into manufacturing and selling of insecticides
and weedicides. The company, with its low cost advantage in India, is focused on
Price Rs 34
exporting pesticide technicals to the international players. The company has started
BSE Sensex 10,967
with the manufacturing of Chlorpyrifos in 1994, over a period of time Bhagiradha
Reuters BHCM.BO has increased its production capacity and added few other molecules to it product
Bloomberg BCHI IN portfolio. Volatility of the INR versus USD has haunted the company’s profitability in

6m avg. daily turnover (US$ mn) 0.00

FY09.

52-week High/Low 74/24 • The key molecules produced by the company are chlorpyrifos, fluroxyoyr and
triclopyr.
Issued Shares 5.1 mn
• The company has production capacity of 2,800 TPA, which it has over a period
Valuation Ratios
of time has increased from the initial capacity of 300 TPA.
Yr to 31 Mar FY07 FY08
• Chlorpyrifos contributes >52% to the revenues. Fluroxyoyr and Triclopyr
EPS (Rs) 19.4 13.0
contribute 34% and 15%, respectively, to the revenues.
+/- (%) 10.0 (33.2)
• The company has signed a pact with Dow Agro Sciences to supply technical of
PER (x) 1.8 2.6
Fluroxypyr, with assured minimum 250 TPA off take.
PBV (x) 0.6 0.5
• Bhagiradha derives >85% of the revenues through exports of the Pesticide
Dividend/Yield (%) 7.4 7.4 Technicals to the countries like Australia, South Africa, Germany, Brazil, etc.
EV/Sales (x) 0.2 0.2 • The company’s profitability was impacted by over Rs 85 mn in FY08 with the
EV/EBITDA 1.1 2.0 appreciation of Rs versus US$.
Shareholding Pattern (%) Outlook
Promoters 25 Bhagiradha’s growth prospect is more dependants on the capacity expansion and
FIIs 1 addition of new products to its portfolio. Bhagiradha has approval for manufacturing
Public & Others 75 over 12 products, of which it is now manufacturing only 4. The company is looking
for opportunities in the remaining 8 products and is contemplating to introduce few
Relative performance new products in FY10-12. However, these plans are in initial stage and any significant
250 contribution from the new products would come only in FY11. >85% of the company
200 revenue is US$ denominated. The company is exposed to the risk of the fluctuation
150 of Rupee versus US dollar. Further, Bhagiradha’s revenue is more skewed towards
100 Chlorpyrifos, the demand for the product has been coming down and the product has
50 consequently facing significant erosion in price.
0
At the current market price of Rs 34, the stock is trading at 2.6x FY08. We do not
Jan-04

Mar-05
Oct-05
May-06
Dec-06
Jul-07
Jan-08
Aug-04

Aug-08
Apr-09

have a rating on the company.

Bhagiradha Chemicals
(Actual)
Sens ex

AGROCHEMICALS AND SEEDS 107

 B&K RESEARCH APRIL 2009

Business overview
Background
Bhagiradha chemicals was incorporated in July 1993 and promoted by Mr S Koteswara
Rao, Mr C. Vidya Sagar and Mr D. Sadasivudu. The promoters, Mr S Koteswara Rao
and Mr D. Sadasivudu were earlier worked with Indian Institute of Chemical
Technology (IICT) Hyderabad, which is a premier chemical R&D Institute in India. In
1996, the company began commercial production by setting up a plant with 300 TPA
capacities to manufacture Chlorpyrifos in Ongole, Andhra Pradesh. Since then the
company has increased its production capacity in phases to 2,800 TPA.

Products
Bhagiradha products are focused towards Insecticides and Weedicides. The company’s
product portfolio includes two insecticides – Chlorpyrifos, Fluroxypyr and two
Weedicides – Triclopyr, Imidacloprid.
Product-wise revenue contribution
100 46%
34%
80
60
%

40
20
0%
0 14% 6%
FY04 FY05 FY06 FY07 FY08
Chlorpyriphos - Technical
Fluroxypyr - Technical (MT) Chlorpyriphos - Formulationb
Triclopyr - Technical (MT) Triclopyr - Technical
Chlorpyriphos - Formulationb (Ltr) Imidacloprid - Formulation
Chlorpyriphos - Technical (MT) Fluroxypyr - Technical

Source: Company

The company was producing only Chlorpyrifos for ten years since its started production
in 1994 to 2004. The fall in the market size, price erosion and increase in competition
in Chlorpyrifos market prompted Bhagiradha to develop other products and added
Fluroxypyr, Triclopyr, Imidacloprid to its product portfolio.

- Chlorpyrifos

Chlorpyrifos technicals and formulation contribute 45.3% and 5.9%, respectively,

to the revenues. Chlorpyrifos is used in wide variety of crops such as cotton, chilly,
rice, sugarcane, vegetables in agriculture to control aphids, fleas and in structural
and household to control termites, cockroaches, ticks, and many other insects.
The company increased the production from capacity from 300 TPA in 1994 to
1,000 TPA in FY01 and then to 1,500 TPA 2002. Bhagiradha now has 2,000
MTPA chlorpyrifos manufacturing capacity. The company exports the technicals
to BASF, Isagro, Wockard, BVA, etc. The Chloryrifos market size has shrunk from

AGROCHEMICALS AND SEEDS 108

B&K RESEARCH APRIL 2009

US$ 450 mn in 2002 to US$ 390 mn in 2005 and now the market size is estimated
to be US$ 300 mn. The realisation of the product dropped from US$ 10-11/kg in
1994 to US$ 6.5-7/kg in 2008.

Product profile
Products Production Market Size Key export Major
capacity (MTPA) US $ mn destinations Clients

Chlorpyrifos 2,000 300 Europe, Southeast BASF, Isagro,

Asia, Australia Wockard, etc.

Fluroxypyr 400 30 – Dow

Triclopyr 300 100 Australia –

Imidacloprid 100 1,000 Stopped manufacturing due to

unavailability and raise in price of
Raw material

• Triclopyr

Triclopyr technicals contributes >15% to the revenues. Bhagiradha has capacity

to produce 300 TPA. Triclopyr is an insecticide with over US$ 100 mn market
across the world. It is a high value product, US$ 15/kg and has been used
predominantly in vegetable, fruit and field crops, ornamental and forestry plantings.
Bhagiradha exports its entire Triclopyr production to places like Australia, New
Zealand, Europe, Southeast Asia.

• Fluroxypyr

Fluroxypyr contributes over 33% of Bhagiradha’s revenue. The company has

facilities to manufacture 400 TPA and exports the entire quantity produced.
Bhagiradha has entered into pact with Dow Agrosciences for the supply of
Fluroxypyr. According to the deal Dow will purchase a assured minimum quantity
of 250 TPA and Bhagiradha will be supplying Fluroxypyr only to Dow.

AGROCHEMICALS AND SEEDS 109

 B&K RESEARCH APRIL 2009

Financials
Revenue
Bhagiradha’s revenue witnessed a CAGR of 5% during the period FY06-08. Revenues
declined by 1.8% in FY08. The company’s revenue was impact by the appreciation of
Rupee versus US dollar. The company has not introduced any new products in FY08.
Margins Geographic revenue mix
25 800 80
700 60
20 600 40
500
20

Rs mn
15

%
400
%

0
10 300
200 (20)
5 100 (40)
0 (60)
0 FY04 FY05 FY06 FY07 FY08
FY04 FY05 FY06 FY07 FY08
Domes tic Export
EBITDA (%) PBIT (%) PAT (%) Domes tic YoY Export YoY

Source: Company

Net profit
Bagiradha’s net profit fell by 33.2% to Rs 65 mn in FY08 vs. Rs 98 mn in FY07. The
company’s net profit margin has come down by 380 bps to 8% in FY08 versus 11.8%
FY07. The fall in the realisation of the products on the back of appreciation of Rupee
versus US dollar impacted the profitability of the company.
Financial highlights
(Rs mn) 3QFY08 3QFY09 YoY (%) 9MFY08 9MFY09 YoY (%) FY06 FY07 YoY (%) FY08 YoY (%)

Net Sales 208 196 (5.8) 609 701 15.0 740 832 12.3 817 (1.8)

EBITDA 32 29 (9.3) 85 115 35.5 134 155 16.0 87 (43.7)

OPM (%) 15.2 14.7 – 14.0 16.5 – 18.1 18.7 – 10.7 –

Other Income 1 1 0.4 2 2 3.2 35 26 (25.6) 25 (3.3)

Depreciation (6) (7) 12.3 (18) (20) 14.2 (19) (21) 9.4 (24) 15.5

Interest (4) (5) 25.3 (9) (11) 23.9 (16) (12) (26.1) (14) 22.1

PBT 23 18 (20.5) 60 86 42.7 134 149 11.1 74 (50.1)

Tax (3) (4) 34.5 (8) (17) 113.8 (45) (51) 13.3 (9) (82.6)

PAT 20 14 (28.1) 52 69 31.8 89 98 10.0 65 (33.2)

EPS (Rs) 1.5 2.6 74.5 1.5 2.6 74.5 17.6 19.4 10.0 13.0 (33.2)

AGROCHEMICALS AND SEEDS 110

 B&K RESEARCH APRIL 2009

Bhagiradha Chemicals and Industries

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08 Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08

Net sales 611 740 832 817 Pre-tax profit 101 134 149 74

Growth (%) 29.5 21.1 12.3 (1.8) Depreciation 13 19 20 23

Chg in working capital (87) (77) 54 (130)
Operating expenses (539) (607) (676) (730)
Total tax paid (28) (38) (50) (9)
Operating profit 72 134 155 87
Cash flow from oper. (a) (1) 37 173 (41)
EBITDA 72 134 155 87 Capital expenditure (85) (59) (22) (57)
Growth (%) 244.1 85.7 16.0 (43.7) Cash flow from inv. (b) (85) (59) (22) (57)
Depreciation (13) (19) (21) (24) Free cash flow (a+b) (86) (22) 150 (99)
Other income 51 35 26 25 Equity raised/(repaid) 1 0 0 0
EBIT 110 150 160 88 Debt raised/(repaid) 95 31 (105) 90
Dividend (incl. tax) (9) (14) (14) (15)
Interest paid (9) (16) (12) (14)
Cash flow from fin. (c) 87 17 (120) 75
Pre-tax profit 101 134 149 74
Net chg in cash (a+b+c) 1 (5) 31 (24)
(before non-recurring items)
Pre-tax profit 101 134 149 74
Key Ratios
(after non-recurring items)
Yr end 31 Mar (%) FY05 FY06 FY07 FY08
Tax (current + deferred) (38) (45) (51) (9)
Net profit 63 89 98 65 EPS (Rs) 12.4 17.6 19.4 13.0
EPS growth 85.7 41.8 10.0 -33.2
Adjusted net profit 63 89 98 65
Book NAV/share (Rs) 30.3 45.2 61.7 71.7
Growth (%) 85.7 41.8 10.0 (33.2)
Dividend/share (Rs) 1.5 2.5 2.5 2.5
Net income 63 89 98 65 Dividend payout ratio 13.8 16.2 14.7 22.6
Tax 37.9 33.5 34.2 11.9
Balance Sheet EBITDA margin 11.8 18.1 18.7 10.7
Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08 EBIT margin 18.0 20.2 19.3 10.8
RoCE 34.5 32.8 32.0 15.8
Current assets 327 410 434 462 Net debt/Equity 130.3 103.0 31.9 58.7
Net fixed assets 235 275 277 312
Total assets 562 684 711 774
Valuations
Yr end 31 Mar (x) FY05 FY06 FY07 FY08

Current liabilities 162 172 220 142 PER 2.7 1.9 1.8 2.6
PCE 2.3 1.6 1.4 1.9
Total Debt 210 241 136 225 Price/Book 1.1 0.8 0.6 0.5
Other non-current liabilities 36 43 44 44 Yield (%) 4.4 7.4 7.4 7.4
EV/Net sales 0.6 0.5 0.3 0.5
Total liabilities 408 456 399 411
EV/EBITDA 5.2 3.0 1.7 4.4

Share capital 51 51 51 51 Du Pont Analysis – ROE

Reserves & surplus 103 178 261 312 Yr end 31 Mar (x) FY05 FY06 FY07 FY08

Shareholders’ funds 153 228 312 363 Net margin (%) 10.3 12.0 11.8 8.0
Asset turnover 1.4 1.2 1.2 1.1
Total equity & liabilities 562 684 711 774
Leverage factor 3.5 3.3 2.6 2.2
Capital employed 400 512 491 631 Return on equity (%) 50.0 46.7 36.2 19.4

AGROCHEMICALS AND SEEDS 111

 B&K RESEARCH APRIL 2009

UPDATE Excel Crop Care Not Rated

Share Data Focused player

Market Cap. Rs 887 mn (US$ 16.9 mn) Excel Crop Care (Excel) is one of the established players in the Indian agrochemical
space. Excel Industries (India) Ltd. spun off generic pesticide business to form Excel,
Price Rs 81
primarily to allow Nufarm to acquire a 14% stake in the company in 2003. Excel’s
BSE Sensex 10,967
agrochemicals business includes insecticides, herbicides, fumigants and rodenticides.
Reuters EXCR.BO
• In FY08, Excel derived 64% of its revenue from Insecticide, 23% from weedicides
Bloomberg EXCC IN
and 10% through the sale of fumigants and rodenticides.
6m avg. daily turnover (US$ mn) 0.01
• The key pesticides manufactured by the company include glyphosate, endosulfan,
52-week High/Low 188/58
chlorpyrifos, aluminium phosphide and zinc phosphide, which are extensively used
Issued Shares 11 mn in crops such as cotton, paddy, soya bean, and in horticulture & plantation crops.
Valuation Ratios • Excel is the first company in Asia to develop and produce glyphosate and
Yr to 31 Mar FY07 FY08 endosulfan. Excel is the largest producer of endosulfan in India.
EPS (Rs) 16.8 22.4 • With the increasing demand for the herbicides, Excel commissioned a new plant
+/- (%) (15.1) 33.5 for manufacturing glyphosate Technical in FY07 at Bhavnagar, Gujarat. The new
PER (x) 4.8 3.6 plant has helped increase the glyphosate capacity by 3000 TPA
PBV (x) 0.9 0.8 • Excel going forward will concentrate more on herbicides for growth.
Dividend/Yield (%) 4.7 6.2 • Exports constitute ~34% of the revenues. The export business posted a CAGR
EV/Sales (x) 0.4 0.4 of 22.5% for the period FY06-08.
EV/EBITDA 6.1 5.3 • To increase the geographic reach in exports, the company is looking to expand
Shareholding Pattern (%) into China, Russia and SAARC nations and expanding portfolio of branded
Promoters 19 formulations.

FIIs 2 Outlook
BFSI’s 13 Glyphosate is now the world’s largest selling molecule among all the pesticides and the
Public & Others 67 market size is estimated to be over US$ 3.8 bn. The price realisations of glyphosate
has been highly volatile in 2008, with increase in demand on the back of effectiveness
Relative performance of the molecule in controlling herbicide and partly due to increase in the usage of GM
700 glyphosate – tolerant roundup ready crops. Excel, with the expanded capacity and
600
major revenue contribution from Glyphosate has benefitted in 2008. Market for key
500
400 molecules of Excel, glyphosate, endosulfan and chlorpyrifos, continues to witness fall
300 in market demand and price erosion. Excel is looking to immunise these negative
200
impacts with the growth in the glyphosate and through expansion of geographies in
100
0 the export business. However, downward price correction in glyphosate (from $8 to
Jan-04

Mar-05
Oct-05
May-06
Dec-06
Jul-07
Jan-08
Aug-04

Aug-08
Apr-09

$4) and currency hedging losses will haunt the performance of the company.

At the current market price of Rs 81, the stock is trading at 3.6x FY08 EPS of Rs 22.4.
Excel Crop Care (Actual)
Sens ex We do not have a rating on the company.

AGROCHEMICALS AND SEEDS 112

 B&K RESEARCH APRIL 2009

Business overview
Background
Excel Crop Care was formed in 2003, with the spin off of the generic pesticide
business from Excel Industries Ltd. The primary object of spin off was to enable
Nufarm to acquire a 14% stake in the company. Excel Industries was formed in 1941
by Mr C.C. Shroff, with focus on developing agrochemicals, agrochemical
intermediates and specialty chemicals.

Products
Excel Crop Care product portfolio includes over 14 brands. Excel derives 64.1%
revenues from insecticides, Weedicides contributed 23%, and Fungicide & Rodenticides
contributed 4.1% and 5.7%, respectively, to the revenues. The key molecules produced
by the company include Glyphosate, Endosulfan, Chlorpyrifos and Sulfur.

• Glyphosate

Glyphosate is the world largest selling pesticide and the market size is estimated to
be >US$ 3.8 bn and is still growing. Glyphosate was originally innovated by
Monsanto and Monsanto’s patent on glyphosate molecule expired in September
of 2000. Demand for glyphosate has been robust in the past years for reasons like
the low acute toxicity of the molecule than other Herbicides, and partly due to
increase in the usage of GM glyphosate – tolerant roundup ready (RR) crops. In
the US, RR crops drove a more than 15-fold increase in the use of glyphosate on
major field crops from 1994 to 2005. In 2006, the latest data available as per
USDA, glyphosate use on soybeans jumped a substantial 28%. Excel Crop Care is
the second in the world to develop glyphosate technical. In India, apart from
Excel (Glycel), the other producers of glyphosate are Monsanto (Roundup),
De’Nocil (Weed off), and Pesticides India (Comet).

Segment-wise sales contribution Geography-wise sales

4% 6% 3% 3,500 40
23% 64%
3,000
30
2,500
2,000 20
Rs mn

1,500 10
1,000
Ins ecticides 0
500
Weedicides 0 (10)
Fungicides FY05 FY06 FY07 FY08
Rodenticides
Domes tic Exports
Others Domes tic YoY Growth Exports YoY Growth

Source: Company

AGROCHEMICALS AND SEEDS 113

B&K RESEARCH APRIL 2009

- Endosulfan

Endosulfan is first innovated by Hoechst AG (Now part of Bayer CropScience) in

1954. Endosulfan is been used to control insect pests including whiteflys, aphids,
leafhoppers, Colorado potato beetles, cabbage worms, and other pests. Endosulfan
is one of the more toxic pesticides in the market and has been banned for use in
over 17 countries. It is been contemplated for ban in Europe and US. Bayer has
voluntarily withdrawn its product from US in 2007 and continues to sell in other
parts of the world. Excel is the largest producer of endosulfan in India and a
supplier to the Bayer. Global market size of endosulfan is ~ US$ 120 mn and is
been falling. Excel’s ‘Endocel’ is the leading brand in India and other producers
include Agro, Evo (Thiodan), Hyderabad Chemicals (Hysulfan), EID Parry (Parry
sulfan), Dhanuka (Endodhar), NFCL (Speed), Shaw Wallace (Endostar), Hindustan
Insecticides (Hildan), United Phosphorus (Thiokill).

• Chlorpyrifos

Chlorpyrifos is used in wide variety of crops including cotton, sugarcane, paddy,

Chilly. This pesticide was introduced in Indian markets in 1994. Initially over 13
companies were manufacturing through licencing the technology developed by
IICT. With increase in the aggregate production the price of the generic has seen
significant erosion from US$ 10-11/kg in 1994 to US$ 6.5-7/kg in 2008 and
currently ruling at US$ 5-6/kg. Other key players in the Chlorpyrifos includes laze
(Indofil), Dursban, Ruban (DeNocil), Radar (Searle India), Naklor (Dupont), Scout
(AIMCO), Dhanwan 20 (Dhanuka), Durmet (Cynamid Agro), Classic (Lupin), Force
(NFCL), Strike (Wockhardt).

Business tie ups

Nufarm, one of the leading agriculture chemical companies, holds 14.69% stake in
Excel Crop Care. Nufarm bought this stake in Excel Crop Care from promoters in
FY02. The deal was then expected to benefit Nufarm with access to chlorpyrifos, which
was then one of the world’s largest selling insecticides (approx. US$ 450 mn). Excel was
expected to benefit with Nufarm’s technology and the rights to access its registration
data, and supply of herbicide products to Excel for sale within the Indian domestic
market.

Excel Crop Care, which was expected to cater to the demand of chlorpyrifos from Nufarm,
acquired 25.23% stake in Aimco Pesticides for Rs 60 mn. The company was aiming to use
the capacity of Aimco’s chlorpyrifos manufacturing facility to supply to Nufarm.

However the entire plans of selling chlorpyrifos did not materialise as expected. The
overall market for chlorpyrifos fell from US$ 450 mn in 2002 to US$ 390 mn in 2007.
The demand for the product across the world has come down significantly with
restriction of the usage in many countries due to its toxicity and price erosion with
increase in the production facilities.
AGROCHEMICALS AND SEEDS 114
 B&K RESEARCH APRIL 2009

Financials
Revenue
Excel’s revenue witnessed a CAGR of 15.5% for the period FY06-08. The company’s
revenue grew by 25.8% to Rs 5,096 mn versus Rs 4,050 mn in FY07. The growth in
the revenue has come on the back of incremental volume of Glyphosate production
and better realisations.

Net sales Net profit

6,000 35 300 7
5,000 30 250 6
25 5
4,000 200
20 4

Rs mn
Rs mn

150

%
3,000

%
15 3
2,000 100
10 2
1,000 5 50 1
0 0 0 0
FY04 FY05 FY06 FY07 FY08 FY04 FY05 FY06 FY07 FY08
Net s ales YoY Growth Net profit NPM

Source: Company
Net profit
Excel’s net profit posted a CAGR of 6.5% for the period FY06-08. The company’s
net profit growth lagged the revenue growth, with the increase in the competition,
price erosion of the key products, etc. The company net profit grew by 33.5%, with
20 bps expansion in net profit margins (NPM) on the back of expanded capacity and
improvement in realisations in FY08.
Financial highlights
(Rs mn) 3QFY08 3QFY09 YoY (%) 9MFY08 9MFY09 YoY (%) FY06 FY07 YoY (%) FY08 YoY (%)
Net Sales 1,187 1,097 (7.6) 3,984 5,825 46.2 3,818 4,050 6.1 5,096 25.9
EBITDA 63 92 – 386 791 105.2 402 282 (29.9) 379 34.6
OPM (%) 5 8 – 10 14 – 11 7 – 7 –
Other Income 19 17 (12.0) 49 49 (1.3) 100 194 94.9 183 (5.6)
Depreciation (17) (17) (2.3) (51) (60) 17.5 (77) (85) 11.4 (87) 2.2
Interest (25) (37) 52.2 (72) (102) 42.3 (84) (96) 14.0 (99) 3.6
Extraordinary items* – (107) – 15 (315) – – 64 – – –
PBT 40 (53) – 326 363 11.1 341 295 (13.5) 376 27.6
Tax (15) 10 – (113) (135) 18.8 (123) (110) (10.7) (129) 17.6
PAT 25 (43) – 213 228 7.1 218 185 (15.1) 247 33.5
EPS (Rs) 2.3 (3.9) – 19.4 20.8 7.1 19 16 (14.2) 21 29.4
Adjusted PAT 25 64 – 198 543 173.5 211 181 (14.2) 234 29.4
Adjusted EPS (Rs) 2.3 5.9 – 18.0 49.3 173.5 19.8 16.8 (15.1) 22.4 33.5

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 B&K RESEARCH APRIL 2009

Excel Crop Care

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08 Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08

Net sales 3,813 3,818 4,050 5,096 Pre-tax profit 342 341 295 376
Growth (%) 31.4 0.1 6.1 25.9 Depreciation 17 10 27 56
Chg in working capital (148) 36 (165) (332)
Operating expenses (3,442) (3,416) (3,768) (4,717)
Total tax paid (119) (117) (87) (136)
Operating profit 371 402 282 379
Other operating activities (31) (8) (4) (31)
EBITDA 371 402 282 379 Cash flow from oper. (a) 62 262 65 (67)
Growth (%) 47.3 8.2 (29.9) 34.6 Capital expenditure (59) (124) (98) (155)
Depreciation (71) (77) (85) (87) Chg in investments 0 (59) 7 8
Other income 111 100 194 183 Cash flow from inv. (b) (59) (183) (91) (147)
EBIT 412 425 391 476 Free cash flow (a+b) 2 79 (26) (214)
Equity raised/(repaid) 17 17 12 5
Interest paid (70) (84) (96) (99)
Debt raised/(repaid) (23) (40) 114 254
Pre-tax profit 342 341 295 376
Dividend (incl. tax) (47) (47) (48) (64)
(before non-recurring items)
Cash flow from fin. (c) (53) (71) 78 194
Pre-tax profit 342 341 295 376 Net chg in cash (a+b+c) (50) 8 51 (20)
(after non-recurring items)
Tax (current + deferred) (120) (123) (110) (129)
Key Ratios
Net profit (before minority 222 218 185 247
interest, Pref. dividend, etc.) Yr end 31 Mar (%) FY05 FY06 FY07 FY08
Prior period adjustments (3) (7) – (13) EPS (Rs) 20.2 19.8 16.8 22.4
Net income 219 211 181 234 EPS growth 113.8 (2.0) (15.1) 33.5
Adjusted net profit 222 218 185 247 Book NAV/share (Rs) 63.6 80.0 93.1 107.2
Dividend/share (Rs) 3.7 3.7 3.7 5.0
Growth (%) 113.8 (2.0) (15.1) 33.5
Dividend payout ratio 21.2 21.6 26.1 26.1
Tax 35.0 36.1 37.3 34.4
Balance Sheet EBITDA margin 9.7 10.5 7.0 7.4
Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08 EBIT margin 10.8 11.1 9.7 9.3
RoCE 24.9 23.7 19.4 20.2
Cash & marketable securities 93 102 153 133 Net debt/Equity 117.4 87.8 81.5 94.0
Other current assets 1,781 1,624 1,904 2,543
Investments 19 78 71 63 Valuations
Net fixed assets 622 737 808 907 Yr end 31 Mar (x) FY05 FY06 FY07 FY08
Total assets 2,515 2,540 2,937 3,646
PER 4.0 4.1 4.8 3.6
PCE 3.0 3.0 3.3 2.7
Current liabilities 791 670 786 1,093
Price/Book 1.3 1.0 0.9 0.8
Total Debt 914 874 988 1,242 Yield (%) 4.7 4.7 4.7 6.2
Other non-current liabilities 110 116 138 131 EV/Net sales 0.4 0.4 0.4 0.4
Total liabilities 1,815 1,660 1,912 2,466 EV/EBITDA 4.6 4.1 6.1 5.3

Share capital 55 55 55 55 Du Pont Analysis – ROE

Reserves & surplus 677 841 974 1,125 Yr end 31 Mar (x) FY05 FY06 FY07 FY08
Less: Misc. expenditure (33) (16) (5) 0
Net margin (%) 5.8 5.7 4.6 4.8
Shareholders’ funds 700 880 1,024 1,180 Asset turnover 1.6 1.5 1.5 1.5
Total equity & liabilities 2,515 2,540 2,937 3,646 Leverage factor 3.9 3.2 2.9 3.0
Capital employed 1,724 1,870 2,150 2,553 Return on equity (%) 35.9 27.6 19.4 22.4

AGROCHEMICALS AND SEEDS 116

 B&K RESEARCH APRIL 2009

UPDATE JK Agri Genetics Not Rated

Share Data Betting on indigenous technology

Market Cap. Rs 355 mn (US$ 7.1 mn)
JK Agri Genetics was formed through demerger of seeds business from JK Industries
in 2003. The company over a period of two decades started with marketing of millets
Price Rs 98
and food grains later added fibre, oil, pulse and vegetable crop seeds to its portfolio. It
BSE Sensex 10,967 is the first and only Indian seeds company to develop Bt Cotton with indigenous
Reuters JKAR.BO technology using Cry1Ac gene.
Bloomberg JKAGRI IN • JK Agri Genetics produces hybrid seeds of crops like bajra, jowar, cotton, maize,
6m avg. daily turnover (US$ mn) 0.01 rice, sun flower, tomato, etc.

52-week High/Low 354/65 • JK Agri Genetics is one of the leading player in bajra and jowar (sorghum) hybrid

Issued Shares 3.5 mn seed segment in India

Valuation Ratios • Beginning FY07, the company started commercialisation of Bt cotton seeds
produced through indigenously developed technology, and has been branded
Yr to 31 Mar FY07 FY08
“X-gene” technology. The company currently has over 8 Bt cotton hybrids
EPS (Rs) 15.6 18.4
approved for commercialisation.
+/- (%) (48.8) 17.8
• JK Agri Genetics is planning to develop and commercialise improved version of its
PER (x) 6.3 5.3 Bt cotton, containing a stacked combination of cry1Ac and cry1EC genes, by 2010.
PBV (x) 0.4 0.4 • The company has started focusing on export of organic agriculture produce and
EV/Sales (x) 0.4 0.4 plans to diversify into herbal and medicinal plants.
EV/EBITDA 7.6 8.8 • The company has established biotechnology lab in Hyderabad and research farms
Shareholding Pattern (%) to carry out its research activities.

Promoters 41 • The company apart from having entered into research agreements with Indian
technology and science institutes has also tied up with private and public research
FIIs 5
institutes in countries like the US, Australia and Holland.
BFSI’s 4

Public & Others 50

Outlook
JK Agri is focusing on Bt cotton and hybrid rice for growth in the coming years. In the past
Relative performance millets were the significant revenue contributors for JK Agri. However, with the change in
600 food preference and consequent fall in the acreages are leading to the decline in the hybrid
500 seeds market of the millets. The company is countering the slow down in the millets seed
400
sale with the improvement in Bt cotton and hybrid rice segment. Increasing competition,
300
falling prices, limited scope for improvement in acreage and adoption preference shifting
200
towards Bollgard-II variety will be the key challenges for JK Agri in cotton segment.
100
0 However, investment value (Rs 142/share) and the proposed demerger of the same into
an investment company will limit the downside to the share price from current levels.
Mar-04
Sep-04

Jun-06
Jan-07
Jul-07
Feb-08
Sep-08
Nov-05
Apr-05

Apr-09

At the current market price of Rs 98, the stock is trading at 5.3x FY08 EPS of Rs 18.4.
JK Agri genetics (Actual)
Sens ex We do not have a rating on the company.

AGROCHEMICALS AND SEEDS 117

B&K RESEARCH APRIL 2009

Background
JK Agri Genetics, an erstwhile division of JK Industries Ltd., was established in 1989
with its headquarters at Hyderabad, Andhra Pradesh (India). JK Agri Genetics Ltd.,
promoted by the Singhania group, was spun off as a separate entity from JK Industries
in 2003. It is part of the century-old J.K. Organization, which has business interests in
automotive tyres, paper and pulp, cement, sugar, and other areas. Other group
companies include JK Tyre, JK Paper, JK Lakshmi Cement, Fenner (India), JK Sugar,
Umang Dairies, CliniRx Research and other associated companies.

Business
JK Agri focuses on hybrid seeds of crop like sorghum, pearl millet, maize, cotton, rice,
sunflower, tomato and okra. The plant is located at Hyderabad with an installed
processing capacity of 100 tpd. The company has a biotech lab, which is recognised
by the Department of Science and Technology, Government of India. It is involved in
collaborative research projects with several institutes and agricultural universities for
product development. The company markets its seeds under the brand name ‘JK
Seeds’ with an establishment of nine regional offices and network of more than 250
distributors and 20,000 retail dealers.

Indigenous Bt cotton technology

JK Agri is the only company in India to have developed BT cotton seed varieties
indigenously. The company has jointly developed the technology along with BREF-
IIT Kharagpur. It has received approval from GEAC for its four Bt cotton hybrid
varieties in September 2006 and launched the seed commercially in 2007. The
company received approval for another five varieties in 2007.

JK Agri is now looking at launching improved version of its Bt cotton, containing a

stacked combination of cry1Ac and cry1EC genes, by 2010. The company has signed
agreement with the Council of Scientific and Industrial Research’s (CSIR) National
Botanical Research Institute, Lucknow (NBRI) to commercialize their new Bt cotton
technology using Cry 1EC gene in India. The new gene (Cry IEC), developed by
NBRI, would be stacked along with the existing Bt cotton carrying Cry 1Ac gene. JK
Agri’s exiting Bt was a variant of Monsanto’s Bollgard-I, and the new event will a
variant of Bollgard-II.

In kharif 2006, the company sold around 200,000 packets, each containing 450 gm of
Bt hybrid cotton seeds. In kharif 2007, the firm has sold around 600,000 packets. The
company is expected to have sold ~1 mn packets of Bt cotton seeds in kharif 2008.

Demerger plans
JK Agri is planning to demerge its investment holding into a separate company and it
is awaiting court’s approval for the same.

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 B&K RESEARCH APRIL 2009

Investment holding (quoted) details

Company No. of equity CMP Total investment
shares (mn) (Rs) value (Rs mn)

JK Paper Ltd. 6,675,248 14.6 97.5

JK Lakshmi Cement Ltd. 6,822,520 36.5 249.0

Umang Dairies Ltd. 1,194,965 4.8 5.7

JK Sugar Ltd. 271,035 12.6 3.4

JK Tyre & Industries Ltd. 4,525,554 31.8 143.9

Total 500

Financial highlights
(Rs mn) 3QFY08 3QFY09 YoY (%) 9MFY08 9MFY09 YoY (%) FY06 FY07 YoY (%) FY08 YoY (%)

Net Sales 38.9 27.5 (29.3) 497 626 26 618 787 27.4 886 12.7

EBITDA (48.4) (122.3) – 52 (97) – (1) 45 – 39 (12.8)

OPM (%) NA NA – 11 NA – NA 6 – 4 –

Other Income – – – – – – 142 62 (56.5) 79 27.6

Depreciation (4.4) (4.3) (2.9) (13) (13) (3.9) (18) (19) 6.4 (21) 10.2

Interest (3.2) (6.9) – (8) (17) 114.7 (1) (3) 437.4 (10) 269.6

PBT (56.1) (133.2) – 31 (126) – 123 85 (30.7) 87 2.6

Tax (0.7) (1.5) – (3) (3) 11.1 (16) (30) 90.5 (23) (24.8)

PAT (56.8) (134.8) – 28 (129) – 107 55 (48.8) 64 17.8

EPS (Rs) NA NA – 7.7 NA – 30.5 15.6 (50.9) 18.4 22.8

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 B&K RESEARCH APRIL 2009

JK Agri Genetics

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08 Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08

Net sales 661 618 787 886 Pre-tax profit 18 123 85 87

Growth (%) 27.3 (6.6) 27.4 12.7 Depreciation 16 17 18 20
Operating expenses (653) (619) (742) (847) Chg in working capital 7 (61) (48) (444)
Operating profit 9 (1) 45 39 Total tax paid (1) (4) (6) 231
EBITDA 9 (1) 45 39 Other operating activities 0 0 (2) 0
Growth (%) (58.5) (115.0) NA (12.8) Cash flow from oper. (a) 40 76 47 (106)
Depreciation (17) (18) (19) (21) Capital expenditure (8) (10) (74) (34)
Other income 37 142 62 79 Chg in investments 10 (32) 0 3
EBIT 28 123 88 97 Cash flow from inv. (b) 2 (42) (74) (31)
Interest paid (1) (1) (3) (10) Free cash flow (a+b) 42 34 (27) (137)
Pre-tax profit 28 123 85 87 Debt raised/(repaid) 3 0 90 68
(before non-recurring items) Cash flow from fin. (c) 3 0 90 68
Non-recurring items (10) 0 0 0 Net chg in cash (a+b+c) 45 34 63 (70)
Pre-tax profit 18 123 85 87
(after non-recurring items)
Key Ratios
Tax (current + deferred) (6) (16) (30) (23)
Yr end 31 Mar (%) FY05 FY06 FY07 FY08
Net profit (before minority 12 107 55 64
interest, Pref. dividend, etc.) Adjusted EPS (Rs) 6.3 30.5 15.6 18.4
Prior period adjustments 0 0 (2) 0 EPS growth (32.5) 383.1 (48.8) 17.8
Net income 12 107 53 64 Book NAV/share (Rs) 190.6 221.0 236.0 254.4
Adjusted net profit 22 107 55 64 Tax 27.5 30.7 13.0 35.7
Growth (%) (32.5) 383.1 (48.8) 17.8 EBITDA margin 1.3 (0.2) 5.7 4.4
EBIT margin 4.3 20.0 11.2 11.0
Balance Sheet RoCE 2.6 10.6 6.8 6.8
Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08 Net debt/Equity 46.5 35.8 36.7 49.5

Cash & marketable securities 119 152 215 146

Other current assets 429 471 639 968
Valuations
Investments 636 668 668 666 Yr end 31 Mar (x) FY05 FY06 FY07 FY08
Net fixed assets 267 260 315 329 PER 15.5 3.2 6.3 5.3
Total assets 1,451 1,551 1,838 2,109 PCE 8.8 2.8 4.7 4.0
Price/Book 0.5 0.4 0.4 0.4
Current liabilities 339 330 471 605 EV/Net sales 1.0 1.0 0.8 0.9
Total Debt 429 429 519 587 EV/EBITDA 76.0 (481.8) 14.4 20.1
Other non-current liabilities 15 17 20 25
Total liabilities 783 776 1,011 1,217 Du Pont Analysis – ROE
Yr end 31 Mar (x) FY05 FY06 FY07 FY08
Share capital 460 460 460 460
Reserves & surplus 208 315 367 432 Net margin (%) 3.3 17.3 7.0 7.3
Shareholders’ funds 668 775 827 892 Asset turnover 0.5 0.4 0.5 0.4
Total equity & liabilities 1,451 1,551 1,838 2,109 Leverage factor 2.2 2.1 2.1 2.3
Capital employed 1,112 1,222 1,367 1,504 Return on equity (%) 3.3 14.8 6.8 7.5

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 B&K RESEARCH APRIL 2009

UPDATE Punjab Chemicals and Crop Protection Not Rated

Share Data Debt ridden

Market Cap. Rs 1 bn (US$ 21.4 mn) Punjab Chemicals and Crop Protection (PCCP) is into manufacturing and selling of
pesticides and pesticide intermediaries. The company is also into manufacturing industrial
Price Rs 161
and pharmaceutical chemicals. The company has started its operations in 1978
BSE Sensex 10,967
manufacturing oxalic acids. Over a period of time, PCCP has increased its product
Reuters PCHM.BO
offering and expanded geographic presence organically and through acquisitions.
Bloomberg PCCP IN
• PCCP agro chemical division contributes 75% to the total revenues, industrial
6m avg. daily turnover (US$ mn) 0.11 chemical division contributes 10% to the revenues, pharma division and
52-week High/Low 315/105 international trading contributes 10% and 5%, respectively, to the total revenues.
Issued Shares 6.6 mn • The company has strong presence in the sulphur and phosphorus based agrochemicals
Valuation Ratios • Oxalic acid and its derivatives account for >25% to the agrochemical revenues.
Yr to 31 Mar FY07 FY08
• International business contributes over 60% to the revenues. The company exports
EPS (Rs) 10.1 40 its agrochemical intermediaries and technicals to international companies.
+/- (%) (50.8) 295.6 • PCCP has made three key acquisitions between FY06-09, including Sintesis
PER (x) 15.9 4.0 Quimica SAIC (Argentina), and Pegevo Beheer BV (Netherlands).
PBV (x) 1.3 1.0 • The company has benefitted with the favorable exchange rate, raw materials
Dividend/Yield (%) 1.6 2.5 contracted at lower price levels in 2008, and increase in the product prices in 1HFY09.
EV/Sales (X) 0.8 0.9 • PCCP’s total debt to equity stood at 400% at the end FY08 and interest cover is at
EV/EBITDA 13.2 7.5 meager 1.4x
Shareholding Pattern (%) Outlook
Promoters 47 PCCP is trying to imitate the strategy of United Phosphorus, growing through acquisitions.
FIIs 1 Substantial increase working capital and acquisitions led to 158% increase in the debt.
BFSI’s 3 The company is looking at raising funds through equity issue to reduce the debt levels.

Public & Others 49 Given the current market conditions, the company will not be able to raise funds from
the market in near future. On the core business front, the fall in demand for industrial
Relative performance chemicals and improvement in supplies of agrochemicals from china has led to fall in the
700 realizations for the products. Thus PCCP will face challenges on both financial and
600
business front. The company is planning to launch two new fungicides in 2009. Lack of
500
400 strong presence in international markets, dependence on highly competitive generic
300
products, disproportionate increase in working capital, high debt level and low interest
200
100 coverage are the key concerns about the company. Further, the company has not provided
0
for any loss arising out of exposure to forex derivative contracts (MTM loss of Rs 114
Jan-04

Mar-05
Oct-05
May-06
Dec-06
Jul-07
Jan-08
Aug-04

Aug-08
Apr-09

mn as on December 2008), which expires on December 2010.

Punjab Chemicals & At the current market price of Rs 161, the stock is trading at 4.0x FY08. We do not
Crop Protection (Actual)
Sens ex have a rating on the company.

AGROCHEMICALS AND SEEDS 121

 B&K RESEARCH APRIL 2009

Business overview
Background
PCCP was incorporated in 1975. The company was initially promoted by Mr S.D.
Shroff, in association with Excel Industries Ltd. and Punjab State Industrial
Development Corporation (PSIDC). Over a period, the company has amalgamated
and acquired other group companies like Alpha Drugs, STS Chemicals, etc. Mr Shalil
Shroff, son of Mr S.D. Shroff, is the Managing Director of the company. In 1978, the
company began commercial production by manufacturing Oxalic acid and derivatives.
Over a period, the company has forward integrated into agrochemical formulations.
Further, acquisitions and amalgamations marked the company’s foray into other
segments like bulk pharma and industrial chemicals.

Agrochemicals
Agrochemicals division contributes over 75% to the overall revenues. PCCP’s current
product offerings include 6 Technicals, 7 branded bulks and around 40 branded
formulations. Key products include triclopyr, tebuconazole, imidachlorprid, benalaxyl,
etc. The company also manufactures and sells other intermediate products like Oxalic
acid and derivatives, and mercaptan derivatives used in industries like pesticides,
textile, leather metal treatment, etc.

Oxalic acid and its derivatives account for >25% of the agrochemical revenues.
PCCP has an installed capacity of 12,000 mtpa of oxalic acid and 3,850 mtpa of
oxalic acid derivatives. The company also exports agrochemical technicals and
intermediaries to companies like Makhteshim Agan (Israel), Syngenta, Dow Chemicals,
etc.
Business segment profile
Division Revenue Key products Key export Key clients

contribution (%) destinations

Agrochemical 75 Oxalic acid & derivatives Europe, Isreal, USA, Syngenta, Agan, Dow
Southeast Asia, LATAM Chemicals

Industrial 10 Phosphorus based – GSK, Ranbaxy, Pepsi, Coca

chemicals chemicals and oxalates Cola, IPCA Labs

Pharma 10 Anti-bacterial bulk drugs, – GSK, Ranbaxy

trimethoprim, gallic acid

International 5 Organic and inorganic UK, Germany, France, Netherlands, Univar, Molekula, Ubichem,
trading chemicals Taiwan, S. Korea, Japan & USA Charkit, Nagase, Organica

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 B&K RESEARCH APRIL 2009

Industrial chemicals
PCCP manufactures and sells phosphorus derivatives and oxalates. Industrial chemicals
division comprises the business of the erstwhile STC Chemicals Ltd, which was merged
with PCCP in 2005 and contributes ~10% to the company’s revenue. Key products like
phosphorus trichloride, phosphoric acid, phosphorus pentoxide, ferric ammonium
oxalate, sodium oxalate are sold to clients like Dr Reddy’s, GSK, Ranbaxy, Pepsi, IPCA
Labs, etc. With fall in the demand and consequent downwards price correction of
industrial chemicals, the company is set to face challenging times ahead in this segment.

Pharma chemicals
PCCP venture into pharma chemical business by acquiring 54% stake in Alpha Drugs
India Ltd. in 2003. Alpha Drugs was amalgamated with PCCP in 2006. This division
manufactures anti-bacterial bulk drugs and intermediates of penicillin based antibiotics,
Trimethoprim, and gallic acid. Key clients include GSK and Ranbaxy. The company
also undertakes contract manufacturing works for MNCs. Pharma chemical sales
contribute 10% to the revenues of the company.
Financial highlights
(Rs mn) 3QFY08 3QFY09 YoY (%) 9MFY08 9MFY09 YoY (%) FY06 FY07 YoY (%) FY08 YoY (%)
Net Sales 1187 1097 (7.6) 3984 5825 46.2 3818 4050 6.1 5096 25.9
EBITDA 63 92 46.1 386 791 105.2 402 282 (29.9) 379 34.6
OPM (%) 5 8 – 10 14 – 11 7 – 7 –
Other Income 19 17 (12.0) 49 49 (1.3) 100 194 94.9 183 (5.6)
Depreciation (17) (17) (2.3) (51) (60) 17.5 (77) (85) 11.4 (87) 2.2
Interest (25) (37) 52.2 (72) (102) 42.3 (84) (96) 14.0 (99) 3.6
Extraordinary items* – (107) – 15 (315) – – 64 – – –
PBT 40 (53) (231.9) 326 363 11.1 341 295 (13.5) 376 27.6
Tax (15) 10 (168.6) (113) (135) 18.8 (123) (110) (10.7) (129) 17.6
PAT 25 (43) (269.0) 213 228 7.1 218 185 (15.1) 247 33.5
EPS 2.3 (3.9) (269.0) 19.4 20.8 7.1 19 16 (14.2) 21 29.4
Adjusted PAT 25 64 154.8 198 543 173.5 211 181 (14.2) 234 29.4
Adjusted EPS (Rs) 2.3 5.9 154.8 18 49.3 173.5 19.8 16.8 (15.1) 22.4 33.5

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 B&K RESEARCH APRIL 2009

Financials
Revenue
PCCP revenue witnessed a CAGR of 49% during the period FY06-08. Revenues
declined by 60% in FY08. The company’s revenue growth has come on the back of
acquisitions, improvement in organic business and better realisations in FY08.

Revenue Net profit

6,000 70 300 300
Revenue Net profit YoY
60 250
YoY
4,500 50 200
200
40
Rs mn

Rs mn
3,000 150 100

%
30
100
20
1,500 0
10 50

0 0 0 (100)
FY05 FY06 FY07 FY08 FY05 FY06 FY07 FY08
Source: Company

Net profit
PCCP’s net profit increased at 35% CAGR between FY06 and FY08. Profit growth
lagged revenue growth on the back of increase in debt (funded for acquisitions) and
consequent raise in interest outgo. However, favourable exchange rate and better
realisations led to an exceptional growth of 296% in net profits in FY08.

Debt and interest cover Working capital and cash conversion cycle
450 3.0 125 50

375 2.5
2.0 100 40
No. of days

300

%
1.5
%

225
1.0 75 30
150 0.5
75 0.0 50 20
FY05 FY06 FY07 FY08 FY05 FY06 FY07 FY08

Net debt/equity Cas h convers ion cycle

Interes t cover (RHS) Working capital/s ales

Source: Company

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 B&K RESEARCH APRIL 2009

Punjab Chemicals and Crop Protection

Income Statement Cash Flow Statement

Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08 Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08

Net sales 1,829 2,519 3,522 5,622 Pre-tax profit 106 107 117 428
Growth (%) 32.6 37.7 39.8 59.6 Depreciation 25 35 198 178
Chg in working capital (160) (543) (117) (957)
Operating expenses (1,712) (2,392) (3,321) (4,930)
Total tax paid (13) 52 (33) 307
Operating profit 118 127 201 693
Other operating activities 0 0 (1) 0
EBITDA 118 127 201 693 Cash flow from oper. (a) (41) (348) 164 (44)
Growth (%) (20.3) 8.0 58.2 244.6 Capital expenditure (86) (596) (594) (2,322)
Depreciation (37) (65) (79) (197) Chg in investments 0 (2) (10) (96)
Other income 69 148 136 294 Cash flow from inv. (b) (86) (598) (604) (2,418)
EBIT 150 210 258 789 Free cash flow (a+b) (127) (946) (441) (2,461)
Interest paid (53) (77) (141) (361) Equity raised/(repaid) (59) 92 0 (21)
Pre-tax profit 97 133 117 428 Chg in minorities 1 (53) 42 (5)
Debt raised/(repaid) 130 689 483 2,713
(before non-recurring items)
Dividend (incl. tax) (12) (20) (30) (19)
Non-recurring items 9 (26) 0 0
Other financing activities 26 261 14 (18)
Pre-tax profit 106 107 117 428 Cash flow from fin. (c) 86 969 509 2,650
(after non-recurring items) Net chg in cash (a+b+c) (41) 23 69 188
Tax (current + deferred) (40) 3 (47) (163)
Net profit 66 110 70 265 Key Ratios
Adjusted net profit 65 135 67 264
Yr end 31 Mar (%) FY05 FY06 FY07 FY08
Growth (%) (1.2) 107.9 (50.8) 295.6
Prior period adjustments 4 27 (15) EPS (Rs) 9.9 20.6 10.1 40.0
Minority interests 8 0 (4) (2) EPS growth (1.2) 107.9 (50.8) 295.6
Net income 78 137 60 249 Book NAV/share (Rs) 53.1 110.7 126.8 155.7
Dividend/share (Rs) 2.6 4.0 2.5 4.0
Dividend payout ratio 30.2 22.2 28.9 11.7
Balance Sheet Tax (%) 38.0 (2.5) 40.0 38.1
Yr end 31 Mar (Rs mn) FY05 FY06 FY07 FY08 EBITDA margin 6.4 5.0 5.7 12.3
EBIT margin 8.2 8.3 7.3 14.0
Cash & marketable securities 78 38 60 129 RoCE 17.0 13.6 10.7 18.0
Other current assets 728 1,598 2,118 4,327 Net debt/Equity 144.5 160.7 189.8 400.6
Investments 36 39 48 144
Net fixed assets 437 998 1,394 3,538 Valuations
Other non-current assets 0 36 10 0
Yr end 31 Mar (x) FY05 FY06 FY07 FY08
Total assets 1,280 2,708 3,631 8,139
PER 16.3 7.8 15.9 4.0
Current liabilities 318 592 919 2,100 PCE 10.4 5.3 7.3 2.3
Total Debt 544 1,233 1,716 4,429 Price/Book 3.0 1.5 1.3 1.0
Yield (%) 1.6 2.5 1.6 2.5
Other non-current liabilities 68 154 160 584
EV/Net sales 0.9 0.9 0.8 0.9
Total liabilities 930 1,978 2,795 7,113
EV/EBITDA 13.3 17.6 13.2 7.5

Share capital 43 66 66 66
Du Pont Analysis – ROE
Reserves & surplus 314 664 724 907
Less: Misc. expenditure (61) 0 0 10 Yr end 31 Mar (x) FY05 FY06 FY07 FY08
Shareholders’ funds 297 730 790 983 Net margin (%) 3.6 5.4 1.9 4.7
Minorities interests 53 0 46 43 Asset turnover 1.6 1.3 1.1 1.0
Total equity & liabilities 1,280 2,708 3,631 8,139 Leverage factor 3.4 3.7 4.0 6.3
Capital employed 908 2,117 2,666 5,996 Return on equity (%) 19.0 25.1 8.5 28.3

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 B&K RESEARCH APRIL 2009

B&K Securities is the trading name of Batlivala & Karani Securities India Pvt. Ltd.

B&K Investment Ratings:

1. BUY: Potential upside of > +25% (absolute returns)
2. OUTPERFORMER: 0 to +25%
3. UNDERPERFORMER: 0 to -25%
4. SELL: Potential downside of < -25% (absolute returns)

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