India Midcaps

INITIATING COVERAGE

RALLIS INDIA
Encashing emerging trends
India Equity Research| Agriculture

Rallis India (Rallis), a Tata Group company, is an established agrochemical player in India. The company, with market share of ~10% is well placed to capture emerging opportunities in the domestic agrochemical market on back of healthy distribution network, branded farm solutions and launch of new products. Acquisition of Metahelix has further equipped it to cash in on the spurt in the hybrid seed market riding the formers formidable R&D capabilities and strong product pipeline. Additionally, its Dahej SEZ facility is expected to spur export sales and reduce dependence on the domestic market. We initiate coverage with BUY.

EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth

MARKET DATA (R: RALL.BO, B: RALI IN) CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : INR 120 : INR 158 : 168 / 111 : 194.5 : 23 / 430

Poised well to exploit emerging opportunities in agrochemical market

Increasing consumption, rising minimum support price, sharpened government focus and mounting cost of labour will propel domestic agrochemical market to post 10-12% CAGR in the near term. The company has launched 10 products in FY12 (versus average three-four p.a) and this will help to gain market share in the near term. Further, the newly commissioned Dahej SEZ facility is anticipated to boost export sales, consequently reducing its domestic market dependence.

Avg. Daily Vol. BSE/NSE (000) : 183.7 SHARE HOLDING PATTERN (%) Current Q2FY13 Promoters * MF's, FI's & BKs FII's others 50.1 8.9 10.8 30.2 50.1 11.5 11.9 26.6
:

Q1FY13 50.1 11.8 11.6 26.4

Nil

Metahelix to spur hybrid growth

The organised hybrid seed market is expected to post 12-15% CAGR in the coming years. India has a dismal ~2mha of the total 40mha under hybrid seed in rice crop, thus leaving enough room for penetrating untapped markets. Post acquisitions of Metahelix, Rallis is well equipped to ride this surge armed with the formers formidable R&D capabilities and robust product pipeline.

* Promoters pledged shares (% of share in issue)

RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months (3.8) 4.3 10.8 Stock (9.6) (21.0) 0.5 Stock over Sensex (5.8) (25.3) (10.4)

Outlook and valuations: Poised for growth; initiating with BUY

Rallis is expected to post sales and PAT CAGR of 14.2% and 19.2% (FY05-12 CAGR of 11.6% and 23.9%), respectively, over FY12-15E. The company has a strong operating cash flow with a healthy RoE (20%-25%) and dividend payout ratio of ~35%. We value it at P/E of 15x FY15E (without considering positives i.e., land bank, strategic stake in Advinus, income from pulses initiatives). We initiate a `BUY.
Financials Year to March Net revenues (INR mn) Revenue growth (%) EBITDA (INR mn) Core profit (INR mn) Diluted shares (mn) EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROAE (%) FY11 10,862 21.1 1,915 1,258 194 6.4 (22.9) 18.6 12.0 27.0 FY12 12,749 17.4 2,126 1,224 194 6.2 (3.6) 19.2 11.0 22.9 FY13E 14,251 11.8 2,154 1,239 194 6.2 0.3 19.2 10.8 20.6 FY14E 16,492 15.7 2,615 1,660 194 8.3 33.0 14.4 8.6 23.9

Manish Mahawar
+91 22 6623 3481 manish.mahawar@edelweissfin.com Click on image to view video

Manoj Bahety, CFA

+91 22 6623 3362 manoj.bahety@edelweissfin.com

February 27, 2013 Edelweiss Securities Limited

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Agriculture

Investment Rationale
Wide network to widen consumer base further
The INR80bn domestic agrochemical industry is expected to grow at 10%-12% CAGR in near term.
According to the industry, the domestic agrochemical sector has shown a 10Yr CAGR (FY0110) of 7-8% and is worth INR80bn at present. Domestic agrochemical market is expected to grow at 10%-12% CAGR in the near term on the back of increasing consumption levels, rising MSP, better government focus and mounting cost of labour. In India, consumption of agrochemical is well below the global standards.

Chart 1: Consumption pattern of Agrochemicals 21

17

(Per kg/Hectare)

13 8 4

In India, consumption of agrochemicals is well below global standards.

0 Taiwan China Japan USA Korea France UK Pakistan India

Source: Company, Edelweiss research

Rallis with a ~10% domestic market share is well-poised to capture emerging opportunities. It plans to double its farmer reach to 1.0mn in the next two years.

Rallis has domestic market share of ~10% and is well placed to capture emerging opportunities on the back of healthy distribution network, branded farm solutions and launch of new products. Rallis is competing with Bayer Crop science and Syngenta, who are the largest players in India. Other competitors are United Phosphorus, PI Industries, Dhanuka Agritech etc. Rallis has 2500 dealers and 37000 retailers, covering 80%of Indias districts. Further, it uses 700 exclusive outlets of Tata Chemicals for marketing purpose and has extended its reach to 0.5mn farmers. Rallis plans to double the farmer reach over the next two years. The company has established a strong rapport with farmers through Rallis Kisan Kutumbha (RKK) that has extended support in crop protection, led to better yields and quality produce.

New product launches to drive growth

Rallis exited completely from toxic products as a conscious decision in FY12.
Rallis is registering and launching new products on a continuous basis. The company has registered 63 products and launched 38 products during FY05-12 (usually, it launches 3-4 products/pa). Rallis discontinued a few products that had alternative products and less profitable. It has discontinued all red triangle (toxic) products in FY12 as a conscious measure. Rallis launched ten products in FY12 (v/s average 3-4 products/pa) which we believe, will drive the growth in the near term and help to gain market share.

Edelweiss Securities Limited

Rallis India
Chart 2: New product registrations and launches 24
19

Rallis launched ten products in FY12 as against the annual average of 3-4 products. This will drive growth in the near term and help to gain market share.

(No. of products)

15 10 6 1 FY05 FY06 FY07 FY08 FY09 FY10 Launches

Source: Company, Edelweiss research

FY11

FY12

Registrations

Chart 3: Providing Greener products

2001-02
Red 10% Green 30% Yellow 47%

2011-12
Red 0% Yellow 18%

Green 7%

Blue 36% Blue 52%

Source: Company, Edelweiss research

Innovation Turnover Index is expected to be back to normal range of 25%-30% as products launched during FY12 will drive up growth in near term.

Rallis defined its turnover from newly introduced products in the last four years to total turnover as Innovation Turnover Index (ITI). ITI was normally 25%-30% during FY05-10. It has fallen down to 20% and 11% in FY11 and FY12, respectively. Key revenue generating products Applaud and Takumi have come out of the ITI in FY11 and FY12. Hence, index has fallen down substantially (including revenue from both the products turnover innovation index stood at 20% in FY12). We expect that ITI will be back to normal bracket of 25%-30% because products launched during FY12 will drive the growth in near term.

Edelweiss Securities Limited

Agriculture
Chart 4: Innovation turnover index
38.0 32.0 26.0

(%)

20.0 14.0 8.0

Key products Applaud and Takumi have come out of the ITI in FY11 and FY12. Hence, index has fallen down substantially

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Source: Company, Edelweiss research

Table 1: Some of the Key Products Launched during FY10-12 Products Description Taarak Rice Herbicide Ergon A unique fungicide product which enhance the yield Ralligold Plant Growth Nutrients Toran Pesticide for Cotton crop Saaras Fungicide with collaboration of Syngenta Neon An effective insecticide for the management of cotton jassids and tea mites Sonic A granular insecticide for paddy and sugarcane Vaar Soyabean post emergence herbicide for the management of all major weeds Honcho Pre-post emergent herbicide for the management of all major weeds in Onion Cylo Post emergent herbicide for grassy weeds in rice Tata Bahaar Plant Growth Promoter (PGP) for vegetables and fruit crops to improve the growth and yield
Source: Company, Edelweiss research

Dahej to boost exports further

Dahej facility has potential to generate cumulative turnover of INR5bn over the next three years. It will boost export sales and reduce dependence on the domestic market.
In FY12, Rallis has set up a new pesticide plant of 5000MT/PA in Dahej, Gujarat (SEZ) with the capex of INR1.8bn. This plant will enjoy tax exemption for the initial five years and has a potential to generate cumulative turnover of INR5bn over three years. The new plant would primarily cater to export market as the company is targeting higher export sales growth v/s domestic sales growth on the back of increased contribution from existing geographies and entry to newer market. The Dahej facility will drive the export sales and reduce dependence on the domestic market.

Edelweiss Securities Limited

Rallis India
Chart 5: Export sales and contribution to total sales 7,000
5,600 4,200 2,800 1,400 0 40.0 32.0 24.0 16.0 8.0 0.0

(INR mn)

FY13E

FY14E

Source: Company, Edelweiss research

Metahelix a growth ladder

In December 2010, Rallis entered into a definitive agreement to acquire a majority stake of 53.5% in the Bengaluru-based seeds research company Metahelix Life Sciences (Metahelix) in an ~INR1bn all-cash deal funded largely through internal accruals. Further, the company increased its stake to 75.64% at the end of FY12 and total investment increased ~INR1.6bn. Rallis further increased its stake to 77.02% during Q3FY13. As per the agreement, Rallis will enhance its shareholding to 100% in Metahelix over a period of five years. Organised hybrid seeds market is worth INR100bn (including vegetable seeds market size INR20bn) in India and is expected to post 12-15% CAGR in coming years. India has ~2m ha (of total 40m ha) under hybrid seed in rice crop, which is the next big opportunity for the industry as well as Rallis. Area under rice hybrid seed is likely to reach 4-5m ha over the three-four years. Metahelix boasts of a good product portfolio in paddy, maize, millets & vegetable seeds, and has a nationwide presence through its brand 'Dhaanya Seeds'. It has strong R&D capabilities with ~70 scientists. We believe that Metahelix is well positioned to capture the market due to strong R&D capabilities and product pipeline. Metahelix has launched ten new seed hybrids and conducted extensive field activities in FY12 which is expected to support the strong growth trajectory in the near term. Further, strong distribution network of Rallis and Tata Chemicals will accelerate the growth of Metahelix, going forward. Rallis guided to achieve cumulative net sales of INR10bn in initial five years. Metahelix had sales of INR0.4bn during FY11 i.e. at the time of acquisition. It has already achieved sales of INR0.8bn in FY12/H1FY13. At present, Metahelixs EBITDA margin is 5%-10%. However, it is expected to be in the range of 15-20% on account of operating leverage, going forward.

India has only ~2mha (of total 40m ha) under hybrid seed in rice crop, which is big opportunity for the industry as well as for Rallis. Metahelix is well positioned to capture the market due to strong R&D capabilities and product pipeline.

Rallis guided to achieve cumulative sales of INR10bn in the initial five years from seed business. Seed business EBITDA margin is expected to improve on account of operating leverage.

Edelweiss Securities Limited

FY15E

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(%)

Agriculture
Chart 6: Metahelix Seeding growth
2,500 2,000 16.0 12.8 9.6 6.4 3.2 0.0 FY11 Sales FY12 FY13E EBITDA FY14E FY15E EBITDA margin
Source: Company, Edelweiss research

(INR mn)

1,500 1,000 500 0

Into organic manure business

Rallis guided to achieve cumulative sales of INR1bn in next five years from organic manure business.
Rallis entered into an agreement to acquire 51% stake in Zero Waste Agro Organics for INR0.3bn in April 2012. Company makes organic manure from waste of sugarcane mills and has brand Geogreen. Acquisition would be funded through internal accruals. The company guided cumulative sales of Rs1bn in the next five years from the acquisition.

Edelweiss Securities Limited

(%)

Rallis India

Valuations
At current valuation, Rallis is trading at a premium to domestic peers and at par with global peers on account of Better financials Brand recognition Higher return ratio (RoE of 20%-25% ) Marketing synergy with Tata Chemicals (TCL).

We strongly believe that Rallis will trade at premium, going forward too. We are initiating coverage on Rallis with BUY rating, valuing the stock at P/E of 15xFY15E. Though, we have not considered the positives listed below, either in estimate or valuation. Surplus land bank: Rallis has considerable surplus land which it can divest any time as per its requirement. As per media sources, the company is holding 110acres of land (85acres in Hyderabad and 25acres in Mumbai). We believe both the property together could fetch ~INR3bn (~INR15/share or ~13% of CMP) Strategic stake in Advinus: Rallis has a ~14% stake in Advinus Therapeutics (Advinus), with a total investment of INR0.18bn. Advinus is a research-based pharmaceutical company founded by leading global pharmaceuticals executives and promoted by the Tata Group. Company offers development services to pharma, agro and biotech industries. Income from pulses initiatives (with TCL): TCL has forayed into branded pulses, retailing under brand I-Shakti with Rallis. TCL has introduced four variants Tur, Moong, Chana and Urad retailing under brand I-Shakti. Rallis would encourage farmers to grow pulses, provide them necessary agri-inputs and pay them higher prices (v/s MSP) for their produce. Tata Chemicals is targeting INR50bn of sales in the next five years from this initiative. Hence, we believe that even 1% margin for Rallis could generate INR0.50bn (~24% of FY12 EBITDA) of EBITDA in the next five years.

Table 2: Peer Comparison

Companies Domestic Players Rallis India PI Industries United Phosphorus Big Six Global Players Monsanto Syngenta Bayer BASF Dupont Dow Chemical Global Generic Players FMC Corp Nufarm (Global) EPS Growth (%) P/E (x) ROE (%) Mcap DPS D-Yield (USD bn) CY13/FY14E CY14/FY15E CY13/FY14E CY14/FY15E CY13/FY14E CY14/FY15E CY11/FY12 % 0.4 0.3 1.0 52.9 40.4 80.7 90.9 43.5 37.9 8.0 1.5 33.0 37.3 25.9 14.3 10.1 9.1 11.2 18.0 24.4 14.5 12.3 26.8 26.1 19.1 11.9 5.4 9.6 9.3 12.4 24.8 15.8 9.5 14.4 10.9 5.9 19.0 14.5 12.3 12.4 11.8 13.4 14.6 11.7 11.4 8.6 5.0 16.9 13.7 11.2 11.4 10.5 10.7 12.6 10.7 23.9 26.1 18.6 20.0 24.1 21.8 19.4 31.5 13.7 25.5 25.9 18.9 20.1 21.7 20.5 19.1 29.0 15.6 2.2 5.0 2.5 1.3 9.5 1.7 2.5 1.7 1.2 1.8 0.8 2.0 1.3 2.4 2.3 3.4 3.7 3.8

27.4 26.4 0.4 0.7 8.7 9.0 0.1 1.1 Source: Bloomberg, Edelweiss research
Edelweiss Securities Limited

Agriculture
Chart 7: One year forward P/E 200
20x 160 15x 120

Rallis is trading at lowest valuation of past three years

(x)

10x 80 40 0 5x

Dec-06

Aug-08

Dec-11

Oct-07

Apr-05

May-07

Nov-09

Apr-10

Chart 8: One year forward EV/EBITDA 250

200 150
(x)

May-12

Sep-05

Feb-06

Sep-10

Mar-08

Feb-11

Oct-12

Jan-09

Jun-09

Jul-06

Jul-11

15x

100 50 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

10x

5x

Chart 9: One year forward P/BV 250

200 150

6x

(x)

4x 100 2x 50 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
Source: Bloomberg, Edelweiss research

Edelweiss Securities Limited

Rallis India

Key Risks
Weather: Crop protection industry faces the risks of seasonal weather factors. The weather can affect the presence of pest infestations as well as affect the demand for crop-protection products. In the domestic market, sales are highly seasonal, mainly during the monsoon. Any adverse change in the weather will have a negative effect on the sales.

Chart 10: Correlation of monsoon v/s Rallis sales growth 27.0

16.0 5.0

(%)
(6.0) (17.0) (28.0) FY06 FY07 FY08 FY09 FY10 FY11 FY12 Monsoon % Departure Rallis Sales growth (%)
Source: IMD, Company, Edelweiss research

Genetically modified (GM) crops: The usage of crop protection products is significantly less for GM crops. Hence, growth and acceptance of GM crops by consumers may have an adverse effect on Rallis business. Overseas regulation: Rallis is registering its products in the overseas market. Any negative measure by the respective countries can affect the companys growth adversely.

Edelweiss Securities Limited

Agriculture

Company Description
About Rallis India
Rallis is a Tata Group owned Agrochemical Company and a key player in India. Tata Chemicals holds 50.09% in Rallis India. Company has employee strength of 857 as on March 31, 2012 and have plants located at Akola, Ankaleshwar, Ratnagiri and Bharuch. Agrochemical and seed business constitute ~94% and ~6% in consolidated FY12 sales. Company acquired Bangalore based seed players Metahelix during FY11 and entered into an agreement to acquire 51% stake in Zero Waste Agro Organics in April 2012. Rallis has broad and diversified product portfolio in terms of crops as well as type of pesticide.

Chart 11: Standalone sales breakup (FY12)

Fungicide 25%

Chart 12: Consolidated Sales breakup (FY12) Seed 6%

Insecticide 45%

Export 30%

Domestic 64%
Herbicide 30%
Source: Company. Edelweiss research

According to customer engagement survey by Gallop, Company has 7 of the top 12 brands when it comes to awareness of brands in Indian agrochemical market.

Table 3: Strong Brands in Portfolio Brands Confidor Contaf Rogor Asataf Tata Mida Contaf Plus Fame Antracol Tata Mono Applaud Proclaim Hostathion

Players Bayer Rallis Rallis Rallis Rallis Rallis Bayer Bayer Rallis Rallis Syngenta Bayer
Source: Company. Edelweiss research

10

Edelweiss Securities Limited

Rallis India
Rallis has strong relationship with global majors and entered into several alliances such as Dupont, Syngenta, Bayer, among others. These tie-ups enable it to offer a bouquet of specialty products, addressing varied crop protection needs.

Table 4: Details of alliances Players FMC, USA Nihon Nohyaku Co. Ltd. , Japan Dupont, USA Syngenta Bayer Gharda Chemicals Makhteshim Chemical Works Borax, USA Yara International Asa

Brand/Products Furadan, Tatafuran, Electra, Impeder Applaud, Fuji 1 Daksh, Rekord Preet, Anant, Paralac, Prabhav, Sartaj Tata Mida, Spiro Fateh, Koranda Captan, Atrazine, Nova Micronutrient Boron Range of specialty products
Source: Company, Edelweiss research

About Metahelix Lifescience

Metahelix is an agricultural biotechnology company focusing on developing traits and technologies for crop production and improved productivity. Hybrid seeds and traits are commercialized by its wholly owned subsidiary Dhaanya Seedsthat serves as a production and marketing organization for technologies developed by Metahelix. At present, Dhaanya Seeds markets farmer driven hybrids in major food crops such as rice, maize, pearl millet, sorghum, oil seeds (sunflower), fibre crop (cotton). In vegetables, the focused crops are tomato, hot pepper (chilli), brinjal, gourds and water melon. A large number of new hybrids in these crops are also under test in actual farming conditions for evaluation that would be ready for commercial launch in the next 1-2years. Metahelix has launched ten new seed hybrids and conducted extensive field activities in FY12 which is expected to support the strong growth trajectory in the near term. Dhaanya Seeds is well supported by Metahelixs world class infrastructure consisting of 20000sqft laboratory space and 24000sqft green house. Company has production operations in Karnataka, Tamilnadu and Andhra Pradesh. Metahelix has management team with rich agricultural experience. It has strong R&D capabilities with ~70 scientists.

A large number of new hybrids are also under test in actual farming conditions for evaluation that would be ready for commercial launch in the next 12years.

11

Edelweiss Securities Limited

Agriculture
Table 5: Metahelixs key personnel in management team Dr. K.K. Narayanan, One of the founder member of Metahelix and is in overall Managing Director incharge of company. Earlier Narayanan was the program lead for Crop Transformation and Functional Genomics at the Monsanto Research Center, Bangalore. Dr. Gautham Nadig, Dr. Nadig is one among the founder members of Metahelix. Dr. Director Nadig leads the Research and Development, Business Development and administrative function of the Company. Before joining Metahelix, Dr. Nadig was a Senior Scientist in the Bioinformatics division of the Monsanto Research Center, Bangalore and later on served as a consultant to Monsanto's Plant Genomics group at Saint Louis. Ravikrishna S., Prior to joining Metahelix, Ravi was with Business Development Director group in E.I. DuPont India Private Limited, Gurgaon and earlier led the seed business at PHI Seeds Limited, Hyderabad. He had also worked with Advanta India (previously ITC Zeneca Ltd) in different positions before leading the Marketing and Business Development function. In his previous roles, Ravi has been responsible for new business initiatives and brings in considerable experience in marketing and business development.
Source: Company, Edelweiss research

12

Edelweiss Securities Limited

Rallis India

Industry highlights
Agrochemical Industry
Global agrochemical industry has shown a 10-year CAGR (FY01-10) of ~4% and is worth USD45bn. Crop protection industry players are categorised into innovators and generics. Innovators are research & development patented product based players like Bayer, Syngenta, BASF, Monsanto, Dow and Dupont. While off-patented product based players are called as generic players. Generic players have a key strength of low-cost manufacturing and wide distribution network.

Chart 13: Global Agrochemical Industry 54.0

47.2

(USD bn)

40.4 33.6 26.8 20.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Company, Edelweiss research

Agrochemicals are necessary to avoid large losses due to weeds, fungal diseases and insect infestations to crops. According to Cheminova (global generic crop protection player), 3050% of crops are saved by usage of spray globally. As per Philips McDougall report (2007), patented products contribute only ~25% to the global crop protection market, while balance market is off-patented (generics). However, 45% of the generic market is still marketed by innovator companies. Hence, we believe that it will be an attractive opportunity for generic players in the future.

13

Edelweiss Securities Limited

Agriculture
Chart 14: Global patented and off-patented market Chart 15: Share of innovators in off-patented market

Patented 25% Innovators 45% Generic Players 55%

Off Patented 75%

Source: Philips McDougall, Edelweiss research

Chart 16: Geography-wise global agrochemical market Rest of World 4%

Asia 26% Europe 27%

North America 21%

Latin America 22%

Source: United Phosphorus, Edelweiss research

As per industry sources, domestic crop protection industry has shown a 10 year CAGR (FY0110) of 7%-8% and is worth INR80bn. Further, 18%-20% of crops are saved on the back of crop protection usage in India. Major agrochemical consuming states in India are from southern and western India belts. Further, paddy (rice) followed by cotton is major agrochemical consuming crop.

14

Edelweiss Securities Limited

Rallis India
Chart 17: State-wise pesticide consumption in India
Others 20% Andhrapradesh 23%

Tamilnadu and Kerala 6% Haryana 7% West Bengal 6% Gujarat 7% Punjab 12%

Karnataka 7%

Maharashtra 12%

Source: Ministry of Agriculture, PI Industries, Edelweiss research

Chart 18: Crop-wise pesticide consumption in India

Others 40%

Paddy 35%

Cotton 25%
Source: Industry, Edelweiss research

Global as well domestic food demand has been driven by increasing population, declining arable land and shift from food to fuels. In India, arable land has been declining since the last four decades. However, food production witnessed 2.1% CAGR (during 1960-2010) primarily on the back of yield improvement.

15

Edelweiss Securities Limited

Agriculture
Chart 19: Stagnant Indias Arable Land 140
128

(m hecatres)

116 104 92 80

Chart 20: Indias food production

282 237 192 147 102 57

(m mt)

Indias agricultural yield is rising with the same CAGR as the world, despite having an absolute yield, which is much lower than the world. Demand for food is growing consistently on account of rising population, diversion from food to fuels, rising income in developing countries etc. Further, declining arable land and climatic problems are imposing supply-side pressures. Hence, we believe that the only solution to increase food availability is to improve agricultural yield that ensures strong trajectory for agricultural inputs like fertilizers, crop protection products, seeds and irrigation facilities.

16

FY60 FY62 FY64 FY66 FY68 FY70 FY72 FY74 FY76 FY78 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10
Source: Department of Agriculture, Edelweiss research
Edelweiss Securities Limited

FY60 FY62 FY64 FY66 FY68 FY70 FY72 FY74 FY76 FY78 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10
Source: Department of Agriculture, Edelweiss research

Rallis India
Chart 21: Agricultural yield 4.0
3.2

(mt / hectare)

2.4 1.6 0.8 0.0

Seed Industry
Indian seed industry is the eighth largest in the world and market size is estimated to be INR80-100bn (including vegetable seeds market size INR20bn). Domestic seed industry is growing at the rate of 12% as compared to 6%-7% globally and is expected to post 12-15% CAGR in coming years. Of this, domestic cotton seed market is worth INR40bn and is expected to be same over the next two to three years on account of declining cotton acreage in India. Nuziveedu Seeds is largest player in hybrid cotton seeds with 25% market share followed by Rashi Seeds and Myhco. Seed Industry has a long business cycle of 13-14years (R&D ~7years, production ~3years and commercialization - ~3years) which plays big entry barrier. India has ~2mha (of total 40mha) under hybrid seed in rice crop, which is the next big opportunity for the industry. Area under rice hybrid seed is likely to reach 4-5mha over the next three to four years. Bayer Crop Science is biggest player in hybrid rice seed with domestic market share of 40%-50%.

17

FY60 FY62 FY64 FY66 FY68 FY70 FY72 FY74 FY76 FY78 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10
World's Yield India's Yield
Source: USDA, Department of Agriculture (India), Edelweiss research
Edelweiss Securities Limited

Agriculture
Chart 22: Indian seed industry crop-wise

Others 40%

Cotton 40%

Vegetable and fruits 20%

Source: Kaveri Seeds, Edelweiss research

18

Edelweiss Securities Limited

Rallis India

Financial Outlook
Healthy financials, dividend payouts
We expect Rallis net sales and PAT to grow FY12-15E at CAGR of 14.2% and 19.2%, respectively (v/s FY05-12 CAGR of 11.6% and 23.9%) on the back of higher growth in export sales, which would be supported by the new facility in Dahej, and the growth in Metahelix seed business. We are considering 4%/12%/12% domestic agrochemical business growth during FY13/14/15 (FY09-12 CAGR of 13.1%), primarily on account of volume growth that we expect, to be driven by new products. During FY12, Rallis domestic business has shown de-growth of 2.2% YoY primarily on account of discontinuation of red triangle (toxic) products and adverse weather condition.

Chart 23: Strong revenue growth to continue 22,500

18,000
(INR mn)

13,500 9,000 4,500 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Agrochemicals - Domestic Agrochemicals - Export Seeds Organic Manure
Source: Company, Edelweiss research

Chart 24: PAT Growth 2,500

2,000
(INR mn)

1,500 1,000 500 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Source: Company, Edelweiss research

19

Edelweiss Securities Limited

Agriculture
The company has improved its EBITDA margin from 11.3% in FY05 to 19.4% in FY10 on the back of product optimization and internal initiatives, though it has come down to 17.6% in FY11 and 16.7% during FY12 on account of higher input cost, sales of low margin products led by erratic rain and contribution of lower margin seed business. We are considering flat consolidated EBITDA margin over FY12-15 despite margin improvement in seed business led by operating leverage. Rallis has shut down its Turbhe, Mumbai plant and shifted its production to new Dahej facility. On account of cessation, the company has given voluntary retirement scheme to its employees and we believe that there will be cost saving pertaining to cessation of Turbhe facility. We have not considered any benefit or margin improvement led by cessation of Turbhe facility. Hence, it will be upside risk to our margin assumption.

Chart 25: EBITDA and EBITDA margin

3,300 2,700
(INR mn)

25.0 20.0 15.0 10.0 5.0 0.0

(%) FY13E FY14E

2,100 1,500 900 300

EBITDA

EBITDA margin
Source: Company, Edelweiss research

Rallss gross debt increased from INR0.1bn in FY10 to INR1.5bn in FY12 (DER from Nil in FY10 to 0.3x in FY12) because company has made substantial investment by way of setting up plant in Dahej (~INR1.8bn), acquisition of Metahelix (~INR1.6bn) and higher working capital requirement (INR0.8bn in FY11 and FY12). We believe there is no major capex likely in the near term as recent initiatives are seen increasing cash-flows. This would lead to a lower debt in the near future and reduce interest outgo. The company has healthy RoE (20%-25%) and strong dividend payout ratio of ~35%.

20

Edelweiss Securities Limited

FY15E

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Rallis India
Chart 26: RoE (%) and Pretax RoCE (%) 60.0
48.0 36.0

(%)
24.0 12.0 0.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E RoE Pretax RoCE
Source: Company, Edelweiss research

Chart 27: Consistent dividend history 93.0

75.2 57.4
(%)

39.6 21.8 4.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Dividend Payout
Source: Company, Edelweiss research

21

Edelweiss Securities Limited

Agriculture

Financial Statements
Key assumptions FY12 Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Domestic rev. growth (%) Export revenue growth (%) Seeds revenue growth (%) Organic manure rev. grw. (%) Raw Material Cost as % Net Revenue Employee expenses as % Net Revenue Other Expenses as % Net Revenue Deprec. rate as % of avg. gross block Interest rate as % of avg. gross debt Tax rate as % of PBT Capex (INR mn) Net borrowings (INR mn) Receivable (days) Inventory (days) Payable (days) Cash conversion cycle (dayes) 6.5 8.8 8.5 47.9 (2.2) 49.5 324.0 NA 58.3 7.1 18.0 6.3 10.5 30.8 1,522 1,429 30 123 195 (42) FY13E 5.5 7.8 7.5 54.5 4.0 20.0 57.0 NA 59.8 6.5 18.6 5.4 13.3 27.7 600 1,422 32 121 175 (22) FY14E 6.5 6.0 6.8 54.0 12.0 15.0 35.0 NA 59.3 6.2 18.6 5.2 9.0 26.2 600 678 35 118 166 (13) FY15E 7.0 6.0 6.0 52.0 12.0 15.0 30.0 35.0 58.8 5.9 18.6 5.2 9.0 25.2 600 (390) 35 120 166 (11) Income statement Year to March Net revenues Raw material costs Gross profit Employee expenses Other expenses Operating expenses Total expenditure EBITDA Depreciation & amortisation EBIT Interest expense Other income Profit before tax Provision for tax Core profit Extraordinary/ Prior period items Profit after tax Minority interest Profit after minority interest Equity shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS DPS Dividend payout (%) Common size metrics (% net revenues) Year to March Gross margin Operating expenses EBITDA margins EBIT margin Interest Net profit margin Growth metrics (%) Year to March Revenues EBITDA PBT Net profit EPS FY12 17.4 11.0 (3.8) (2.7) (3.6) FY13E 11.8 1.3 (3.1) 1.2 0.3 FY14E 15.7 21.4 31.4 34.0 33.0 FY15E 15.0 20.7 26.0 27.7 26.8 FY12 41.7 25.1 16.7 14.4 1.1 9.6 FY13E 40.2 25.1 15.1 13.0 1.5 8.7 FY14E 40.7 24.8 15.9 13.9 0.7 10.1 FY15E 41.2 24.5 16.6 14.8 0.2 11.2 FY12 7,428 5,321 902 2,292 3,195 2,126 287 1,840 141 69 1,768 544 1,224 (217) 1,007 15 992 194.5 6.2 194.5 6.2 7.7 2.2 35.4 FY13E 8,522 5,729 925 2,650 3,575 2,154 303 1,851 208 70 1,713 474 1,239 3 1,242 26 1,215 194.5 6.2 194.5 6.2 7.8 2.3 36.9 FY14E (INR mn) FY15E 12,749 14,251 16,492 18,963 9,786 11,153 6,706 1,017 3,074 4,091 2,615 327 2,288 112 74 2,250 590 1,660 0 1,660 48 1,613 194.5 8.3 194.5 8.3 10.0 2.4 28.9 7,810 1,119 3,535 4,654 3,156 357 2,799 40 77 2,836 716 2,121 0 2,121 75 2,046 194.5 10.5 194.5 10.5 12.4 2.5 23.8

10,622 12,097 13,877 15,807

22

Edelweiss Securities Limited

Rallis India
Balance sheet As on 31st March Share capital Reserves & surplus Shareholder equity Minority interest Long term borrowings Short term borrowings Loan funds Deferred tax liability/asset Sources of funds Tangible assets Intangible assets CWIP (incl. intangible) Total net fixed assets Goodwill on consolidation Non current investments Current investments Cash and cash equivalents Inventories Sundry debtors Loans and advances Other assets Total current assets (ex cash) Trade payable FY12 194 5,336 5,530 14 856 685 1,541 131 7,217 3,612 25 599 4,236 1,533 197 30 112 2,717 1,035 1,358 8 5,118 2,680 FY13E 194 6,028 6,222 26 856 735 1,591 232 8,071 3,909 25 300 4,234 1,533 487 30 169 2,950 1,479 1,358 8 5,795 2,840 1,337 4,178 1,617 8,071 32 FY14E 194 7,095 7,289 48 356 535 891 232 8,459 4,183 25 300 4,508 1,533 487 30 213 3,386 1,685 1,358 8 6,436 3,260 1,488 4,748 1,688 8,459 37 (INR mn) FY15E 194 8,572 8,766 75 0 0 0 232 9,072 4,426 25 300 4,751 1,533 487 30 390 3,930 1,991 1,358 8 7,287 3,729 1,677 5,406 1,881 9,072 45 (INR mn) FY12 992 287 175 1,453 507 946 466 480 FY13E 1,215 303 1,518 509 1,009 301 708 FY14E 1,613 327 0 1,940 71 1,869 600 1,269 FY15E 2,046 357 0 2,403 193 2,210 600 1,610
Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield(%) FY12 6.2 (3.6) 7.7 19.2 4.2 1.8 11.0 1.8 FY13E 6.2 0.3 7.8 19.2 3.7 1.6 10.8 1.9 FY14E 8.3 33.0 10.0 14.4 3.2 1.4 8.6 2.0 FY15E 10.5 26.8 12.4 11.4 2.7 1.1 6.8 2.1 Operating ratios (x) Year to March Total asset turnover Fixed asset turnover Equity turnover FY12 1.9 4.4 2.4 FY13E 1.9 3.8 2.4 FY14E 2.0 4.0 2.4 FY15E 2.2 4.4 2.4 Profitability ratios Year to March ROACE (%) ROAE (%) Receivables (days) Inventory (days) Payables (days) Cash conversion cycle (days) Debt-equity (x) Debt/EBITDA Adjusted debt/Equity (x) FY12 28.3 22.9 30 123 195 (42) 0.3 0.7 0.3 FY13E 25.5 20.6 32 121 175 (22) 0.3 0.7 0.3 FY14E 29.5 23.9 35 118 166 (13) 0.1 0.3 0.1 FY15E 33.9 25.5 35 120 166 (11) 0.0 0.0 0.0 Cash flow metrics Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid FY12 946 (239) (740) (34) (466) (473) FY13E 1,009 (591) 57 (301) (523) FY14E 1,869 (600) 44 (600) (546) FY15E 2,210 (600) 177 (600) (569)

(361) (1,225) (1,433)

Other current liabilities and provisions 1,330 4,010 Total current liabilities & provisions Net current assets (ex cash) Application of funds Book value per share (INR) Free cash flow Year to March Net profit Add: Depreciation Add: Interest and other non-cash items Gross cash flow Less: Changes in working capital Operating cash flow Less: Capex Free cash flow
Peer comparison valuation Name Rallis India PI Industries United Phosphorus

1,108 7,217 28

Market cap (USD bn) 0.4 0.3 1.0

Diluted PE (X) FY14E FY15E 14.4 10.9 5.9 11.4 8.6 5.0

EV/EBITDA (X) FY14E FY15E 8.6 6.7 4.0 6.8 5.2 3.4

ROAE (%) FY14E 23.9 26.1 18.6

FY15E 25.5 25.9 18.9

Source: Edelweiss research

23

Edelweiss Securities Limited

Agriculture

Additional Data
Directors Data
Mr. R. Gopalakrishnan Mr. B.D. Benerjee Mr. Prakash R. Rastogi Mr. Venkatrao S. Sohoni Mr. R. Mukundan Mr. Y.S.P. Thorat Chairman Director Director Director Director Director Mr. Homi R. Khusrokhan Mr. E.A. Kshirsagar Mr. Bharat Vasani Mr. K.P. Prabhakaran Nair Mr. Yoginder K. Alagh Mr. V. Shankar Director Director Director Director Director Managing Director & CEO

Auditors - Deloitte Haskins & Sells *as per last available data
Holding Top -10
Perc. Holding Amansa Investments Fidelity Mutual Fund Sundaram Asset Management L&T Investment Management UTI Asset Management 3.87 3.01 1.74 1.47 1.04 Reliance Capital Asset Management Oriental Insurance Co Argonaut Ventures Amundi Luxembourg SA Blackrock Group Perc. Holding 1.03 1.00 1.00 0.77 0.76 *as per last available data

Bulk Deals
Data No available data Acquired / Seller B/S Qty Traded Price

*as per last available data

Insider Trades
Reporting Data 05 Mar 2012 05 Jun 2012 Acquired / Seller Tata AIG Life Insurance Company Ltd Rakesh Jhunjhunwala B/S Buy Buy Qty Traded 49732 952000

*as per last available data

24

Edelweiss Securities Limited

Rallis India
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Vikas Khemani Nischal Maheshwari Nirav Sheth Head Institutional Equities Co-Head Institutional Equities & Head Research Head Sales vikas.khemani@edelweissfin.com nischal.maheshwari@edelweissfin.com nirav.sheth@edelweissfin.com +91 22 2286 4206 +91 22 4063 5476 +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Agriculture

EID Parry India, Jain Irrigation, PI Industries, Rallis India, Shree Renuka Sugars, United Phosphorus

Recent Research Date 26-Feb-13 Company Agrium Title Price (INR) Recos Not Rated 610 Buy Not Rated

Uncertainty clouds Indian nonurea fertiliser outlook; Global Pulse Stellar performance; Result Update

19-Feb-13 05-Feb-13

PI Industries

PotashCorp Domestic challenges to stay; Global Pulse

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * - stocks under review > 50bn Market Cap (INR) 117 118 Hold 46 Reduce 17 Total 181 < 10bn 7 Reduce depreciate more than 5% over a 12-month period Rating Interpretation Rating Buy Hold Between 10bn and 50 bn 57 Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period

25

Edelweiss Securities Limited

Agriculture
DISCLAIMER
General Disclaimer: This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their dependents from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information provided in these reports remains, unless otherwise stated, the copyright of Edelweiss. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright Edelweiss and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders. Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Analyst holding in the stock: No. Additional Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Enclave Capital, LLC ("Enclave"). Transactions in securities discussed in this research report should be effected through Enclave or another U.S. registered broker dealer. Additional Disclaimer for U.K. Persons The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA"). In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the Order); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as relevant persons). This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report nor any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person. Edelweiss shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the Edelweiss to present the data. In no event shall the Edelweiss be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the Edelweiss through this presentation. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

Access the entire repository of Edelweiss Research on www.edelresearch.com

26

Edelweiss Securities Limited