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Industry growth to remain buoyant

August 17, 2011

Reco Buy CMP Rs 167

Previous Reco Buy Target Price Rs 209


NA NA 5,036 16,731

We met with the management of Rallis India on 16 are the key takeaways-

th

August, 2011. Here

Industry growth to remain buoyant at 12-15% in long run


Domestic agrochemical industry has grown at 12-15% pa in last 3-4 years and the management sounded confident about the sustainability of such growth in long term (56 years) despite growing base affect. Lower per acre consumption of agrochemicals in India (less than 1 kg / acre as against 6-10 kgs in various other markets), increasing affordability factors (thanks to rising MSPs across the crops) of the farmers, increasing education among the farmers (many programmes being organised by the various companies to educate the farmers about the adequate use of various agri inputs), launches of various new products in the market along with many other factors are likely to contribute to sustainable growth of agrochemicals in the country. Aggressive initiatives and agri reforms undertaken by few states like Gujarat, Maharashtra, Chhatisgarh and Bihar have resulted in higher growth in these states. Other states are also likely to step up reforms in their respective states which will drive growth in agrochemicals.

EPS change FY12E/13E (%) Target Price change (%) Nifty Sensex

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

1M 9 21

3M 20 31

6M 12M 32 44 29 39

Relative Price Chart


175 Rs % 40 160 28

Higher demand from herbicide to drive growth in agrochemicals


Herbicides comprises of ~20% of agrochemicals market in India (approx Rs 75 bn) while globally herbicides accounts for 40-50% of total agrochemicals market. With rising labour cost in India and growing unavailability of labour, mainly driven by NREGA, farmers are switching from manual weeding to herbicides. Consequently, herbicide is growing at a faster pace of 25-30% as against industry growth of ~15%. The higher growth in herbicides is likely to continue on account of increasing labor cost.

145

16

130

115

-8

100 Aug-10

-20 Oct-10 Dec-10


Rallis India (LHS)

Feb-11

Apr-11

Jun-11

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn) Agri Input & Chemicals RALI@IN 194 1 194 174/117 33/728 187041 0.7

Rallis- playing aggressively in launch of herbicide products


Though Rallis has been a late entrant in herbicide markets; it has been recently very aggressive in launching new products in herbicides. Among the three products launched in FY12 (Neon (I), Sonic (I) and Vaar (H) and products to be launched in near future Honcho (H), Cylo (H) and Saras (F)), three are herbicides. Herbicides products launched in previous year like Tarak are doing well.

Q1FY12 results strengthens our conviction


Rallis India reported consolidated revenues of Rs 3.0bn, +47% yoy, higher than est of Rs 2.7bn. This was primarily on account of higher than expected revenue contribution of Metahelix, the seed business, in which Rallis acquired 53.5% stake in December 2010. Rallis reported consolidated EBITDA of Rs 435mn, +92%yoy, led by higher EBITDA margins in Metahelix. Consolidated APAT of Rs 231mn, +56% yoy, was higher than est of Rs 136mn.

Shareholding Pattern (%)


Jun-11 Mar -11 Dec-10 Promoters FII/NRI Institutions Private Corp Public
Source: Capitaline

50.7 6.5 19.0 4.6 19.3

50.7 4.2 21.0 3.7 20.4

50.7 3.2 21.1 4.1 20.9

We remain positive and maintain BUY on the stock


Our view on the industry / company is broadly in line with managements view. We expect growth in the agrochemicals industry to remain strong and Rallis being a market leader in many segments will continue to outperform. We estimate revenue CAGR (FY10-13E) of 20% and PAT CAGR of 30% with FY12E/FY13E EPS of Rs 8.9 / Rs 11.6. We have a BUY recommendation on the stock with price target of Rs 209 (18X FY13). Financial Snapshot Rs Mn
EBITDA (Core) 1,562 1,713 2,563 3,322 (%) 17.8 16.1 19.6 21.4 PAT 1,114 1,264 1,722 2,249 EPS (Rs) 5.0 6.5 8.9 11.6 EPS % chg 62.2 29.7 36.2 30.6 RoE (%) 26.1 27.2 30.3 31.5 P/E 32.5 25.7 18.9 14.5 EV/ EBITDA 21.5 19.4 13.0 9.7 P/BV 7.7 6.4 5.2 4.1

Rohan Gupta rohan.gupta@emkayglobal.com +91 22 6612 1248 Balwindar Singh balwindar.singh@emkayglobal.com +91 22 6612 1272

YE-Mar

Net Sales

FY10 FY11 FY12E FY13E

8,787 10,657 13,086 15,520

Emkay Global Financial Services Ltd

Management Meet Update

Rallis India

Rallis India

Management Meet Update

Continues to screen inorganic opportunities in agrochemical space


While sharing its outlook on inorganic opportunities in the sector, management indicated that they were screening opportunities in domestic / global market in agrochemical space. Their seed business is likely to be driven by growth in Metahelix with not too much focus on any further near term acquisition in seeds, since companys strategy is to exploit the potential of Metahelix in the near future. However agrochemicals, especially chemicals remains focus area for acquisitions.

Dahej facility to benefit from rising manufacturing cost in China


Potential from recently commissioned Dahej facility can only be captured over a period of time. Management maintained its cumulative revenue target of Rs5 bn over 5 years from Dahej. Dahej initially will cater to Active Ingredients (AIs) and primarily to exports market, however later on rising share of formulations (higher realisations and higher margins business) will drive its revenues and profitability. India as a country has ample growth opportunities in agrochemical exports / CRAMs market. India also has a favorable advantage over China because of rising cost in China due to factors like rising environment cost, higher power cost and increasing labour cost. Rallis sees strong growth opportunities in such export markets and Dahej facility is likely to tap potential from growing opportunities in future.

Seeds Business- in line with management expectations


Though companys seed business surprised investor community in Q1FY12 (with revenues of Rs 593 mn, EBITDA margins of 20.6% and PBT contribution of Rs 111 mn) but the same was in line with managements target. Seeds being seasonal business (Q1 being the best quarter) and Metahelix, with strong product portfolio of kharif crops performed well in 1st quarter. However subsequent quarter performance is likely to remain subdued. Metahelix is likely to launch its BT cotton hybrid CRY 1 in next 1-2 years which should add to companys performance. However, they did not pegg any number to revenue potential from this.

Rallis enjoys strong brand positioning & brand loyalty


Rallis enjoys strong brand positioning among its peers in the crop protection market. 8 of the top 12 crop protection products in 2010 were under Rallis brand. This compares favorably with 2009 when 7 Rallis brands were among top 12. Brand Positioning in Indian Crop Protection Market
Brand Names Confidor Asataf Rogor Tata Mida Contaf Antracol Thiodon Contaf Plus Tata Mono Tata Fen Fujion Bilzeb Hostathion Larvin Metacid
Source: Company presentation, Emkay Research

Company Bayer Rallis Rallis Rallis Rallis Bayer Bayer Rallis Rallis Rallis Rallis Bayer Bayer Bayer Bayer

Emkay Research

17 August 2011

Rallis India

Management Meet Update

Monsoon picks up- bodes well for Rallis


Management indicated that monsoon has picked up pace in the latter half of July resulting into normal sowings. Paddy sowing is normal in Northern & Eastern India though it has been delayed in South India. Cotton sowing is normal in North India but it has been delayed in Gujarat/Maharashtra. Improvement in monsoons towards the second half bodes well for Rallis and we expect company to benefit from the rising demand for agrochemicals.
Crop Normal area for whole kharif Rice Pulses Sugarcane Oilseeds Cotton 394 107 45 177 94 Area sown on 15thJuly,2011 115 36 51 99 59 115 43 49 102 84 2010 % Change 0% -16% 5% -4% -30% % of normal Area 29% 34% 114% 56% 63%

Oilseeds Soyabean Groundnut Sesame 96 56 18 74 19 5 65 30 4 14% -37% 9% 77% 34% 26%

Pulses Red Gr Green Gr Black Gr 36 26 23 12 8 8 19 11 9 -37% -31% -9% 34% 30% 35%

Source: Company presentation, Emkay Research

Emkay Research

17 August 2011

Rallis India

Management Meet Update

Key Financials
Income Statement
Y/E, Mar (Rs. mn) Net Sales Growth (%) Expenditure Materials Consumed Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adj. PAT After JVs/Ass/MI E/O items Reported PAT PAT after MI Growth (%) FY10 8,787 5.5 7,225 5,034 667 1,524 1,562 45.9 17.8 183 1,378 15.7 275 27 1,626 512 31.5 1,114 64.2 12.7 1,114 (14) 1,099 1,114 64.2 FY11 10,657 21.3 8,944 6,283 696 1,762 1,713 9.7 16.1 175 1,539 14.4 346 40 1,845 580 31.5 1,264 13.5 11.9 1,264 1,264 1,264 13.5 FY12E 13,086 22.8 10,524 7,669 833 2,022 2,563 49.6 19.6 265 2,298 17.6 216 54 2,460 738 30.0 1,722 36.2 13.2 1,722 1,722 1,722 36.2 FY13E 15,520 18.6 12,199 8,971 900 2,328 3,322 29.6 21.4 287 3,035 19.6 233 54 3,213 964 30.0 2,249 30.6 14.5 2,249 2,249 2,249 30.6 Gross Block Less: Depreciation Net block Capital work in progress Goodwill Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Total Assets 3,091 1,564 1,527 1,120 1,402 3,263 1,489 755 119 886 15 3,041 2,595 446 222 4,272 4,057 1,743 2,314 1,695 1,236 256 4,666 2,289 1,064 146 1,154 13 3,891 3,306 586 774 6,275 5,751 2,007 3,744 400 1,236 256 4,968 2,330 1,362 108 1,154 13 3,073 2,510 564 1,895 7,532 6,151 2,294 3,858 400 1,236 256 7,141 2,977 1,701 1,296 1,154 13 3,672 2,977 695 3,469 9,219

Balance Sheet
Y/E, Mar (Rs. mn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities FY10 130 4,115 4,245 0 16 65 81 (53) 4,272 FY11 194 4,855 5,049 21 1,087 85 1,172 32 6,275 FY12E 194 6,111 6,306 21 1,087 85 1,172 32 7,532 FY13E 194 7,798 7,993 21 1,087 85 1,172 32 9,219

Cash Flow
Y/E, Mar (Rs. mn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) Income from investments Others Financing Cashflow Net chg in cash Opening cash position Closing cash position FY10 1,527 183 23 9 1,077 -667 2,152 (949) 1,203 8 28 36 9 (744) (28) (440) 0 (2) -1,205 35 84 119 FY11 1,845 175 25 (124) (236) -697 987 (1,378) -391 54 (116) -63 849 (39) (357) 0 453 -1 119 146 FY12E 2,460 265 54 (57) (1,136) -738 848 (400) 448 0 (54) (431) 0 -485 -37 146 108 FY13E 3,213 287 54 132 (518) -964 2,204 (400) 1,804 0 (54) (562) 0 -617 1,188 108 1,296

Key Ratios
Y/E, Mar Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) (0.3) (1.0) (15) 0.2 0.4 2 0.1 0.3 33 (0.0) (0.1) 40 FY10 16.5 11.4 36.6 26.1 62.6 5.0 6.1 21.8 1.2 32.5 27.5 7.7 3.5 21.5 1.0 FY11 16.1 11.9 35.8 27.2 53.2 6.5 7.4 26.0 2.0 25.7 22.6 6.4 3.1 19.4 0.6 FY12E 19.6 13.2 36.5 30.3 42.2 8.9 10.2 32.4 2.2 18.9 16.4 5.2 2.5 13.0 0.7 FY13E 21.4 14.5 39.1 31.5 43.4 11.6 13.0 41.1 2.9 14.5 12.8 4.1 2.1 9.7 1.2

Emkay Research

17 August 2011

Rallis India

Management Meet Update

Recommendation History: Rallis India RALI IN


Date 22/07/2011 02/05/2011 18/01/2011 27/12/2010 Reports Rallis India Q1FY12 Result Update Rallis India Q4FY11 Result Update Rallis India Q3FY11 Result Update Rallis India Management Meet Update Reco Buy Buy Buy Buy CMP 159 1,390 1,313 1,391 Target 209 1,735 1,800 1,800

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Emkay Research

17 August 2011

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