Rallis India - Event Update Angel Broking

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Rallis India - Event Update

Angel Broking maintains a Neutral on Rallis India.

Rallis India : Sowing seeds

 About the deal: Rallis India (RAIL) has acquired 53.5% stake in Bangalore-based

seeds research company, Metahelix Life Sciences (MLS) for `99.5cr. Going ahead,

RAIL would be infusing an additional `25cr and increase its stake to 59% in MLS,

valuing the company at ~2.0x FY2012E revenues of `100cr, which is in line with

its peers in the seed business Advanta (1.6x) and Kaveri Seeds (2.4x) on TTM

basis. RAIL plans to acquire the balance 41% from the promoter over the next five

years, wherein valuations would depend on achievement of milestones (certain

revenue and profit targets) mutually set by both the companies. Given the strong

cash position, the company would be funding the acquisition through the same.

Our take: RAIL has been scouting for acquisitions to foray into adjacent

businesses and drive growth. Moreover, we believe that given the company’s

healthy cash position, an acquisition was long overdue. With RAIL focusing on

increasing its share of farmers’ agri-spend, there exists huge opportunity in the

`6,500cr worth seed industry with the acquisition of MLS. The seed industry is

growing at a healthy 12-13% p.a. We believe that RAIL is well-placed to tap the

commercial seed segment, which accounts for a mere 25% of the industry.

Notably, MLS enjoys the foremost advantage of being the first Indian company to

have proprietary Bt trait, which is basically a proprietary new variant of Bt Cotton

(to be launched over the next one year). MLS also offers technology, strong brand

and goodwill of existing products coupled with a robust product pipeline and

presence in the international markets. Thus, we believe that the acquisition will

augment RAIL’s top-line and bottom-line going ahead drawing from its vast

distribution network in India (~40,000 retailers cover ~80% of India's districts).

Outlook and Valuation: The seed business fetches higher margins compared to

RAIL’s existing pesticide business. As per RAIL’s management MLS is close to

break even and is unlikely to add much to its bottom-line in the near term. Hence,

we have pruned our estimates for RAIL. On the bourses, post out-performing the

Sensex by 99% yoy, at current levels, the stock is trading at fair valuations of

14.5x FY2012E EPS. Hence, we remain Neutral on the stock

Deal details

Rallis India (RAIL) has acquired 53.5% stake in Bangalore-based seeds research

company, Metahelix Life Sciences (MLS) for `99.5cr. Going ahead, RAIL would be

infusing an additional `25cr and increase its stake to 59% in MLS, valuing the

company at ~2x FY2012E revenues of `100cr, which is in line with its peers in the

seed business Advanta (1.6x) and Kaveri Seeds (2.4x) on TTM basis.

RAIL plans to acquire the balance 41% from the promoter over the next five years,

though valuations of the same would depend on achievement of milestones

(certain revenue and profit targets) mutually set by both the companies. Given

RAIL’s strong cash position (cash and investments stood at `148cr at the end of

2QFY2011), the acquisition would be funded through the same

About Metahelix

MLS has been developing high-performance hybrid seeds in rice, maize, cotton

millets and vegetables for the Indian markets with transgenic traits for insect, viral

and fungal protection. It also provides plant transformation, regulatory sciences

and molecular marker services. MLS has also taken its key products under rice and

maize to international markets like Vietnam, Thailand, Indonesia and Philippines.

Its subsidiary, Dhaanya Seeds, has been involved in commercialising the hybrid

seeds and traits.

MLS was founded by five scientists in 2000, which has increased to become a team

of 50 scientists comprising 20 Phd's and 30 agronomics and plant genomic

specialists. MLS has research facilities in Bangalore, Hyderabad and Aurangabad.

The company has 3,000 contract farmers, a seed processing plant and a ware

house at Hyderabad. Dhaanya Seeds has a field force of 120 agronomists who

reach out to more than 1,000 distributors across the country.

Benefits to Rallis

Given that the seed industry has high entry barriers in form of product IP

(technology), regulatory clearance and substantial investments by way of R&D and

manpower, development of a typical product takes years to complete. We believe

that the acquisition of MLS would bypass all this for RAIL and give it a head-start in

the sector.

MLS has a strong product portfolio comprising over 14 crops - it has 17 products

at the pre-commercialising stage and over 100 products are in the pipeline. MLS

enjoys the foremost advantage of being the first Indian company to have

proprietary Bt trait; Cry1C in Bt Cotton. This is basically a proprietary new variant

of Bt Cotton (to be launched over the next one year). MLS also brings with it the

strong brand name of Dhaanya Seeds, which will aid RAIL in charging a premium

for its products compared to competition. MLS has also obtained approvals for rice

and corn hybrids in Indonesia, Thailand, while approvals in Vietnam and

Philippines in the pipeline.

RAIL would be leveraging its own as well as Tata Chemicals’ strong distribution

network to drive its seed business. At the end of FY2010, more than three lakh

farmers were enrolled with Rallis Kisan Kutumba (RKK) whose data have been

mostly digitised. RAIL plans to cover more than five lakh farmers under RKK by

March 2011. RAIL expects to generate `1,000cr from the seed business, on a

cumulative basis, by the end of FY2015.

Industry background

The `6,500cr Indian seed industry is growing at 12-13% p.a. and the commercial

seed segment accounts for a mere 25% of the total market. Hence, the growth

opportunity for commercial seeds is substantial going ahead.

The unorganised players have a significant presence in the industry though there

has been a gradual shift towards the organised segment.

Key success factors in the industry:

􀂾 Product – technology (hybrid or genetically modified)

􀂾 Product pipeline

􀂾 Brand

􀂾 Market reach and distribution network

Outlook and Valuation

The pesticide industry is expected to continue to register healthy growth in FY2011

on the back of normal monsoons this year. Consequently, RAIL being a major

player in the domestic pesticide market, is expected to grow at a higher pace than

industry. In the seed business, given the substantial huge opportunity coupled with

the strong track record and product portfolio of MLS, we believe that RAIL is wellplaced

to diversify its revenue mix going ahead. Comparatively, the seed business

fetches higher margins than pesticides. Nonetheless, we have pruned our

estimates RAIL on account of: 1) negligible contribution to bottom-line from the

seed business (MLS) in the near term, and 2) cash outflow to fund the acquisition

would result in lower other income.

Post out-performing the Sensex by 99% over the last one year, at current levels, the

stock is trading at fair valuations of 14.5x FY2012E EPS. Hence, we remain

Neutral on the stock.