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CMP 136 BUY Target 168
Investment Arguments
~ Industry Outlook
~ Strong capital management
~ Strong brands, innovative products and deep distribution
driving market share gains in the domestic market
~ Higher productivity, scarce labor driving demand
~ Valuation
Company Description
Rallis India Limited, an agrochemical company, engages in the
manufacture and sale of pesticides, plant growth nutrients, and
seeds in India and internationally. It offers insecticides, fungicides,
and herbicides; cereals and fiber crops, hybrid varieties of maize
and paddy, and cotton; fertilizers; and seed treatment chemicals, as
well as household products, including Termex termiticide, Sentry
synthetic pyrethroid insecticide, and Ralli cockroach control gel.
The company also provides technical and bulk of various molecules
to agrochemical manufacturers; and contract manufacturing
services for technical grades/formulations and intermediaries. It
sells its products through dealers and retailers.
Rallis India Limited operates as a subsidiary of Tata Chemicals
Limited, which holds a 51.04% Stake in the company. Rallis India
has 7 of the top 12 brands in the country. Top 3 brands of
Company by revenue contributed close to 250 Crore in total sales
of FY 10-11. The company has 6 factories located across the
country including Dahej SEZ plant which commissioned this year.
Rallis has a very strong distribution network covering 80% of India’s
districts, and more than 1500 dealers and 30,000 retailers across
India.
Rallis has recently added manufacturing capacities by setting up a
new plant in Dahej (annual capacity of 5000MT). This plant has
been set up in a special economic zone (SEZ) and will mainly cater
to international markets. Rallis is seeing strong enquiries from
customers for contract manufacturing. We expect this plant to scale
up over the next 1-2 years and drive strong growth for the
international business. Rallis should also benefit from excise and
tax savings, given that the plant is located in a SEZ. The Dahej
plant would be exempted from income tax and excise duties for the
first 5 years of operations.
~ Industry Outlook
Agriculture is gaining in significance the world over with the rising
needs from cultivation coupled with limited availability of land under
cropping against the backdrop of the growing population. It is a
given that most of this need will be met by increasing productivity
and making efficient use of natural resources which will see more
constraints into the future.
In India, the changing demographics and increasing aspirations is
leading to a varied set of expectations in the farming sector. The
Government too is seized of all these perspectives and is devoting
increased attention to the farming needs.
The contribution from newer solutions and the farmer interest in
applying these to drive up productivity is beginning to show results.
Prices for many agricultural commodities in India have been
remunerative enabling farmers to invest in the appropriate agri
solutions
The Indian Seed industry is currently valued in excess of Rupees
75 billion, which is the sixth largest in the world. It has grown at the
rate of more than 12% per annum in the last few years. In India,
commercial Seeds account for only 25% of the potential, providing
a huge opportunity in this space.
In 2011-12, pesticides production is expected to grow by 6.5 per
cent. A healthy growth in production is likely to continue in the next
two years. We expect pesticides production to grow by 7.4 per cent
in 2012-13 and by 6 per cent in 2013-14. Assuming rainfall in India
to be normal in the next two years, we expect a rise in pesticides
demand from domestic market. Demand from the overseas market
is also expected to remain healthy in 2012-14. We expect
pesticides export to grow by 10-12 per cent in 2012-14. Thus, a
higher demand for pesticides from domestic as well as international
markets will enable the industry to post a healthy rise in production.
The pesticides industry witnessed a healthy growth in capacity
during April-November 2011. During this period, three pesticides
projects with an outgo of over Rupees 5.10 billion got completed. In
addition to this, five more projects with an outgo of over Rupees
5.60 billion are expected to get completed by March 2012. With the
commissioning of these projects, the outstanding capacity in the
pesticides industry is expected to increase to 136 million tonnes
from 125 million tonnes in 2010-11. The pesticides industry will
continue to add new capacities in 2012-13. We expect pesticides
capacity to increase by 21,200 tonnes to 138 million tonnes in
2012-13. In 2011-12, net sales of the industry are expected to grow
by 14.6 per cent. This will be over and above 15.3 per cent sales
growth reported in 2010-11. The growth in sales will mainly be
driven by higher realisations. However, performance of the industry
will not be satisfactory on the profitability front. In the last few
months, rupee witnessed a sharp depreciation vis-a-vis USD. As
the industry meets nearly 45 per cent of its raw material
requirement through imports, depreciated rupee will drive input cost
of the industry upwards. Besides, the pesticides companies are
also expected to report forex losses in the second-half of 2011-12.
Hence, industry’s PAT margin for the financial year 2011-12 will slip
by 40 basis points to 4.8 per cent.
~ Strong capital management
Rallis’ capital management is best in class compared to its local
peers, based on FY11 debtor days. It maintains working capital
discipline and operates with net negative working capital (Adj). In
addition, it has consistently generated free cash flows and we
expect this trend to continue. We forecast EPS CAGR of 25% over
FY12-FY14E.
~ Strong brands, innovative products and deep distribution
Rallis has invested time and resources to understand farmer’s
needs and created products that address impediments towards
greater productivity. Its comprehensive range of crop protection
chemicals and services are spread across 80% of India’s districts
through an extensive distribution network of loyal and supportive
dealers and retailers. Through its extensive relationship initiatives
Rallis listens to the evolving needs of farmers and comes out with
new and relevant products. Company keenly monitors what is
internally called ‘innovation turnover index’ to ensure that the sale
from new products is a significant proportion of total sales. Over the
last few years Company has introduced new products, a testimony
to the technical expertise and innovative streak that Company has
exhibited to cater its most important customer the Indian farmer. As
a progressive move towards sustainability, the Company has
eliminated ‘red triangle’ products from its portfolio.
Company has also done a noteworthy job in marketing and
branding several new products so that ready adoption and
consumption by farmers follows. The Company is now widely
known for its quick establishment of brands through farmer-centric
launches, field demonstrations and leveraging the immense
goodwill garnered through farmer-relationship initiatives like Rallis
Kisan Kutumba. A customer engagement survey by Gallup reveals
that when it comes to awareness of brands in Indian crop protection
market, Rallis has 7 of the top 12 brands in the country. Top 3
brands of Company by revenue also contribute close to 250 Crore
in total sales.
In 2010-11 Company completed acquisition of a majority stake in
Metahelix Life Sciences, a research led seeds Company. Seed is
the most important and primary Agriculture input. Its quality has a
direct impact on production. With Metahelix, Rallis will be in a
strong position to provide a trustworthy portfolio of seeds to the
Indian farmer. Availability of such seeds will have a direct impact on
farmer’s productivity. For instance, Bollworm and Spodoptera
control are critical for ensuring a good commercial cotton crop and
Metahelix is working on some exclusive solutions of Bt Cotton to
achieve this objective. Company is confident that in time to come
they shall be able to come out with appropriate seeds for a wider
range of crops to enhance productivity.
~ Higher productivity, scarce labor driving demand
Rallis is well- positioned to benefit from the increasing usage of
pesticides in India, driven by an attempt to improve farm yields and
increasing scarcity of labor in rural areas. With huge demand
mismatch between rising Indian population and food production, the
government has been increasing emphasis on improving
productivity. In addition, rising food inflation is hastening the need
for improved agriculture practices to enhance productivity.
According to research, between 25%- 30% of annual crop
production is lost to pests, plant pathogens and weeds. India’s
consumption of crop-protection chemicals is at 381gm/Ha, ~25%
below the global average of 500gm/Ha. This is on account of
fragmented land holdings, poor levels of irrigation, dependence on
monsoons and low awareness regarding benefits of pesticide use.
We believe Rallis, with its leading position; strong product portfolio
and pan-India distribution network will be a key beneficiary from the
increased usage and rising penetration of pesticides in the country.
Another concern facing farmers in rural areas over the last few
years has been scarcity of farm labor, driven by the implementation
of NREGA (National Rural Employment Guarantee Act) which
provides employment at a fixed wage rate in rural and semi-urban
areas. This is forcing farmers to find alternatives to manual labor.
Farmers are increasingly using herbicides (weedicides) to remove
weeds, which have traditionally been done manually. With strong
brand and product portfolio, we think Rallis is well placed to benefit
from the rising demand for herbicides.
Strong brand recall, fresher product portfolio and pan-India
distribution network driving domestic demand. Rallis derived more
than 75% of its FY11 revenues from domestic operations, mostly
through sale of pesticides. It has the second largest market share in
India at around 13% with the largest range of products in the
market. To penetrate further and improve its market share, Rallis
has been following a differentiated strategy to market and promote
its products. It has invested significantly in brand building using
menmonics, slogan designs and colour schemes. It has also
innovatively enhanced visibility of its products by packing it in
differentiated shapes and colours schemes, thereby enhancing
brand profile and visibility. Rallis also has a strong R&D team which
focuses on innovation of new products with enhanced features. It
continuously refreshes its product portfolio and most of its products
have a shelf life of only 4 years. New products come either from
own stable or through its global alliance partners. Rallis has more
than 100 new products at present in various stages of development
at its R&D centre in Bangalore. Currently, ~30% of domestic
revenues come from new products less than 3 years old. New
products provide better margins than existing products thereby
enhancing Rallis’ earnings.
Rallis has very strong distribution network covering 80% of India’s
districts, and more than 1500 dealers and 30,000 retailers across
India. Rallis also has very strong farmer relationship network called
“Rallis Kisan Kutumba” through which it engages farmers by
conducting seminars, demos, and training programmes and offers
advisory services.
~ Valuation
With Dahej Plant in place we think it will help company to boost
both top line and bottom line going forward. We forecast EPS
CAGR of 25% over FY12E-FY14E. We believe that stock should
trade at 17-18x of its FY 13 PE and like to assign price target of Rs.
168 for 12-15 months perspective.
~ Concern
Indian agriculture is dependent on monsoon. In case of drought or
below normal monsoons, demand of products can fluctuate.
Company import more than 40% raw material. Rupees depreciation
will increase their cost of production and hence impact bottom line.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CMP 136 BUY Target 168
Investment Arguments
~ Industry Outlook
~ Strong capital management
~ Strong brands, innovative products and deep distribution
driving market share gains in the domestic market
~ Higher productivity, scarce labor driving demand
~ Valuation
Company Description
Rallis India Limited, an agrochemical company, engages in the
manufacture and sale of pesticides, plant growth nutrients, and
seeds in India and internationally. It offers insecticides, fungicides,
and herbicides; cereals and fiber crops, hybrid varieties of maize
and paddy, and cotton; fertilizers; and seed treatment chemicals, as
well as household products, including Termex termiticide, Sentry
synthetic pyrethroid insecticide, and Ralli cockroach control gel.
The company also provides technical and bulk of various molecules
to agrochemical manufacturers; and contract manufacturing
services for technical grades/formulations and intermediaries. It
sells its products through dealers and retailers.
Rallis India Limited operates as a subsidiary of Tata Chemicals
Limited, which holds a 51.04% Stake in the company. Rallis India
has 7 of the top 12 brands in the country. Top 3 brands of
Company by revenue contributed close to 250 Crore in total sales
of FY 10-11. The company has 6 factories located across the
country including Dahej SEZ plant which commissioned this year.
Rallis has a very strong distribution network covering 80% of India’s
districts, and more than 1500 dealers and 30,000 retailers across
India.
Rallis has recently added manufacturing capacities by setting up a
new plant in Dahej (annual capacity of 5000MT). This plant has
been set up in a special economic zone (SEZ) and will mainly cater
to international markets. Rallis is seeing strong enquiries from
customers for contract manufacturing. We expect this plant to scale
up over the next 1-2 years and drive strong growth for the
international business. Rallis should also benefit from excise and
tax savings, given that the plant is located in a SEZ. The Dahej
plant would be exempted from income tax and excise duties for the
first 5 years of operations.
~ Industry Outlook
Agriculture is gaining in significance the world over with the rising
needs from cultivation coupled with limited availability of land under
cropping against the backdrop of the growing population. It is a
given that most of this need will be met by increasing productivity
and making efficient use of natural resources which will see more
constraints into the future.
In India, the changing demographics and increasing aspirations is
leading to a varied set of expectations in the farming sector. The
Government too is seized of all these perspectives and is devoting
increased attention to the farming needs.
The contribution from newer solutions and the farmer interest in
applying these to drive up productivity is beginning to show results.
Prices for many agricultural commodities in India have been
remunerative enabling farmers to invest in the appropriate agri
solutions
The Indian Seed industry is currently valued in excess of Rupees
75 billion, which is the sixth largest in the world. It has grown at the
rate of more than 12% per annum in the last few years. In India,
commercial Seeds account for only 25% of the potential, providing
a huge opportunity in this space.
In 2011-12, pesticides production is expected to grow by 6.5 per
cent. A healthy growth in production is likely to continue in the next
two years. We expect pesticides production to grow by 7.4 per cent
in 2012-13 and by 6 per cent in 2013-14. Assuming rainfall in India
to be normal in the next two years, we expect a rise in pesticides
demand from domestic market. Demand from the overseas market
is also expected to remain healthy in 2012-14. We expect
pesticides export to grow by 10-12 per cent in 2012-14. Thus, a
higher demand for pesticides from domestic as well as international
markets will enable the industry to post a healthy rise in production.
The pesticides industry witnessed a healthy growth in capacity
during April-November 2011. During this period, three pesticides
projects with an outgo of over Rupees 5.10 billion got completed. In
addition to this, five more projects with an outgo of over Rupees
5.60 billion are expected to get completed by March 2012. With the
commissioning of these projects, the outstanding capacity in the
pesticides industry is expected to increase to 136 million tonnes
from 125 million tonnes in 2010-11. The pesticides industry will
continue to add new capacities in 2012-13. We expect pesticides
capacity to increase by 21,200 tonnes to 138 million tonnes in
2012-13. In 2011-12, net sales of the industry are expected to grow
by 14.6 per cent. This will be over and above 15.3 per cent sales
growth reported in 2010-11. The growth in sales will mainly be
driven by higher realisations. However, performance of the industry
will not be satisfactory on the profitability front. In the last few
months, rupee witnessed a sharp depreciation vis-a-vis USD. As
the industry meets nearly 45 per cent of its raw material
requirement through imports, depreciated rupee will drive input cost
of the industry upwards. Besides, the pesticides companies are
also expected to report forex losses in the second-half of 2011-12.
Hence, industry’s PAT margin for the financial year 2011-12 will slip
by 40 basis points to 4.8 per cent.
~ Strong capital management
Rallis’ capital management is best in class compared to its local
peers, based on FY11 debtor days. It maintains working capital
discipline and operates with net negative working capital (Adj). In
addition, it has consistently generated free cash flows and we
expect this trend to continue. We forecast EPS CAGR of 25% over
FY12-FY14E.
~ Strong brands, innovative products and deep distribution
Rallis has invested time and resources to understand farmer’s
needs and created products that address impediments towards
greater productivity. Its comprehensive range of crop protection
chemicals and services are spread across 80% of India’s districts
through an extensive distribution network of loyal and supportive
dealers and retailers. Through its extensive relationship initiatives
Rallis listens to the evolving needs of farmers and comes out with
new and relevant products. Company keenly monitors what is
internally called ‘innovation turnover index’ to ensure that the sale
from new products is a significant proportion of total sales. Over the
last few years Company has introduced new products, a testimony
to the technical expertise and innovative streak that Company has
exhibited to cater its most important customer the Indian farmer. As
a progressive move towards sustainability, the Company has
eliminated ‘red triangle’ products from its portfolio.
Company has also done a noteworthy job in marketing and
branding several new products so that ready adoption and
consumption by farmers follows. The Company is now widely
known for its quick establishment of brands through farmer-centric
launches, field demonstrations and leveraging the immense
goodwill garnered through farmer-relationship initiatives like Rallis
Kisan Kutumba. A customer engagement survey by Gallup reveals
that when it comes to awareness of brands in Indian crop protection
market, Rallis has 7 of the top 12 brands in the country. Top 3
brands of Company by revenue also contribute close to 250 Crore
in total sales.
In 2010-11 Company completed acquisition of a majority stake in
Metahelix Life Sciences, a research led seeds Company. Seed is
the most important and primary Agriculture input. Its quality has a
direct impact on production. With Metahelix, Rallis will be in a
strong position to provide a trustworthy portfolio of seeds to the
Indian farmer. Availability of such seeds will have a direct impact on
farmer’s productivity. For instance, Bollworm and Spodoptera
control are critical for ensuring a good commercial cotton crop and
Metahelix is working on some exclusive solutions of Bt Cotton to
achieve this objective. Company is confident that in time to come
they shall be able to come out with appropriate seeds for a wider
range of crops to enhance productivity.
~ Higher productivity, scarce labor driving demand
Rallis is well- positioned to benefit from the increasing usage of
pesticides in India, driven by an attempt to improve farm yields and
increasing scarcity of labor in rural areas. With huge demand
mismatch between rising Indian population and food production, the
government has been increasing emphasis on improving
productivity. In addition, rising food inflation is hastening the need
for improved agriculture practices to enhance productivity.
According to research, between 25%- 30% of annual crop
production is lost to pests, plant pathogens and weeds. India’s
consumption of crop-protection chemicals is at 381gm/Ha, ~25%
below the global average of 500gm/Ha. This is on account of
fragmented land holdings, poor levels of irrigation, dependence on
monsoons and low awareness regarding benefits of pesticide use.
We believe Rallis, with its leading position; strong product portfolio
and pan-India distribution network will be a key beneficiary from the
increased usage and rising penetration of pesticides in the country.
Another concern facing farmers in rural areas over the last few
years has been scarcity of farm labor, driven by the implementation
of NREGA (National Rural Employment Guarantee Act) which
provides employment at a fixed wage rate in rural and semi-urban
areas. This is forcing farmers to find alternatives to manual labor.
Farmers are increasingly using herbicides (weedicides) to remove
weeds, which have traditionally been done manually. With strong
brand and product portfolio, we think Rallis is well placed to benefit
from the rising demand for herbicides.
Strong brand recall, fresher product portfolio and pan-India
distribution network driving domestic demand. Rallis derived more
than 75% of its FY11 revenues from domestic operations, mostly
through sale of pesticides. It has the second largest market share in
India at around 13% with the largest range of products in the
market. To penetrate further and improve its market share, Rallis
has been following a differentiated strategy to market and promote
its products. It has invested significantly in brand building using
menmonics, slogan designs and colour schemes. It has also
innovatively enhanced visibility of its products by packing it in
differentiated shapes and colours schemes, thereby enhancing
brand profile and visibility. Rallis also has a strong R&D team which
focuses on innovation of new products with enhanced features. It
continuously refreshes its product portfolio and most of its products
have a shelf life of only 4 years. New products come either from
own stable or through its global alliance partners. Rallis has more
than 100 new products at present in various stages of development
at its R&D centre in Bangalore. Currently, ~30% of domestic
revenues come from new products less than 3 years old. New
products provide better margins than existing products thereby
enhancing Rallis’ earnings.
Rallis has very strong distribution network covering 80% of India’s
districts, and more than 1500 dealers and 30,000 retailers across
India. Rallis also has very strong farmer relationship network called
“Rallis Kisan Kutumba” through which it engages farmers by
conducting seminars, demos, and training programmes and offers
advisory services.
~ Valuation
With Dahej Plant in place we think it will help company to boost
both top line and bottom line going forward. We forecast EPS
CAGR of 25% over FY12E-FY14E. We believe that stock should
trade at 17-18x of its FY 13 PE and like to assign price target of Rs.
168 for 12-15 months perspective.
~ Concern
Indian agriculture is dependent on monsoon. In case of drought or
below normal monsoons, demand of products can fluctuate.
Company import more than 40% raw material. Rupees depreciation
will increase their cost of production and hence impact bottom line.
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