INSTITUTIONAL EQUITY RESEARCH Agro Inputsbackoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Agro_Inputs_-_Sector...of easing/renewed government policies on subsidies – fertiliser

INSTITUTIONAL EQUITY RESEARCH

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Agro Inputs Golden Opportunity: coinciding cycles, catch the turnarounds early... INDIA | Sector Initiation

17 April 2018

What we expect: • Turbulence in the agro‐input sector to wane by FY19. Demand recovery seen towards

the end of FY18. We see 26% profit CAGR in FY18‐21 with global consumption recovery and favourable domestic policy dynamics.

• Positives for the industry: New products gaining strong marketshare and robust export order flows indicate global growth revival. India will see a consumption recovery with GoI being a major enabler.

• Global and Indian cycle is coinciding: creating a plethora of opportunities for Indian agro‐input businesses that are optimally structured in terms of domestic and exports. Change in revenue mix will lead to higher realisations.

• See strong cash flows: Due to radical improvement in the investment and capex cycle, strong focus on cost efficiencies, and factors such as reduced working capital (because of easing/renewed government policies on subsidies – fertiliser segment).

Consolidation phase over, capex cycle to recede, right investments to pay off: In the last few years global agro input industry saw drastic shifts in capital investments and consolidation in their functional and operational strategies – preparing for the trend reversal. With a simultaneous revival in global and domestic markets, Indian agro‐input companies should benefit the most. The capital‐investment cycle of Indian agro‐input companies will mellow and start paying off. Those with a balanced exports and domestic business model will lead growth in FY19‐21. Strong order pipeline signalling global consumption revival: In the past few quarters Indian technical bulk exporters saw a heavy order‐pipeline build‐up; orderbooks almost doubled. Custom synthesis and manufacturing (CSM) players also saw increased service logs and order pipeline; PI Industries (PII)’s management indicated a new product pipeline as well and its total orderbook swelled to US$ 1bn+ by the end of Q3FY18 – to be executed in about seven years. Major markets ‐ North America and Europe ‐ signal better crop‐pattern management, which indicate improved spending on agro‐inputs ahead. Branded play in agrochemicals directly competing against the quartet‐oligopoly: Led by innovation, the Indian agrochemicals industry offers a variety of low‐cost, high‐quality products catering to global markets. India’s largest agrochemical player, UPL, saw significant export revenue CAGR of 17%+ (5 years, till FY17) against a shrinking global agrochemicals industry. UPL and suitors with similar business strategies (innovation, global reach, brand recall, right investments/acquisitions, and cost efficiencies through backward integration) will be major beneficiaries in the expected reversal in the consumption cycle. UPL has pierced the marketshare of the global quartet‐oligopoly, indicating strong brand recall. GoI’s emphasis on rural income to lift domestic agro‐input consumption: The agro‐inputs industry faced low price realisation growth because its consumers were restrained to cheaper options (because of lower spending capacity). With higher rural income, there will be more headroom for spending, bringing back consumer preference into play. Agrochemicals will be a major beneficiary of this, since their products, while of high‐quality and high‐efficacy, were under‐consumed due to high prices vs other inputs. Initiating agro inputs sector with OVERWEIGHT With the sector risks known, we prefer companies that have created strong competitive advantages: • UPL: Strong R&D and technology skills, innovative combination products and improving

CAPEX/investment cycle. Competing against the global majors. • Coromandel: NPK leader. To gain from GoI’s favourable policy revisions – (1) balanced

soil nutrient focus, and (2) DBT: improving cash flows and reducing working‐capital. • Excel Crop Care: Acquisition by Sumitomo yet to play out. • PII: Fairly valued for now. Next trigger will be its potential diversification into newer

verticals.

Companies UPL Ltd Reco BUY (ADD)CMP, Rs 764Target Price, Rs 950

Coromandel International Reco BUYCMP, Rs 534Target Price, Rs 640

Excel Crop Care Reco BUY (ADD)CMP, Rs 3299Target Price, Rs 4000

PI Industries Reco NEUTRALCMP, Rs 864Target Price, Rs 940 Varun Vijayan (+9122 6246 4117) [email protected]


AGRO INPUTS SECTOR INITIATION

Table of Contents

Indian agro inputs – An overview ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3

Leveraging on exports, Favourable operational dynamics will lead to robust growth ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 4

Revival in domestic markets – GoI to be the major enabler ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 8

Outlook ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 20

Key triggers for 2018‐2021 ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 22

Companies

UPL ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 24

Coromandel International ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 38

PI Industries ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 52

Excel Crop Care ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 63



Indian agro inputs: An overview The US$ 16bn Indian agro‐inputs industry, of which exports constitute 18%, has seen a CAGR of 10‐12% over the last 10 years. Of this, the crop‐protection segment grew the fastest with a CAGR of 15‐17%, followed by fertilisers at 7‐8%, and seeds at 10‐12%. Fertilisers form about 63% of the industry, crop protection products (pre‐ and post‐harvest) constitute about 32%, and seeds and plant enhancements are much smaller at around 5%. Despite fluctuating consumption of fertilisers and seeds, the industry has grown consistently, on account of robust growth in crop protection products majorly led by quick growth in exports. Global: Agro inputs is a ~US$ 158bn industry India: Agrochemicals drives agro‐inputs industry

Source: PhillipCapital India Research, Company Sources, Tata Strategic estimates Currently at around US$ 2.8bn (crop protection + seed‐tech), Indian exports have huge near‐term growth potential driven by major markets of Latin America, US, and South East Asia. Larger investments in improving crop yields and higher adoption of scientific methods by developing countries (mainly Brazil, China, and South East Asian nations) combined with increasing affordability have led to strong demand for Indian agrochemicals exports (low sales price is a major driver). Global agro inputs: Product‐wise mix Indian agro inputs: Product‐wise mix

Source: Industry analysis, Company, PhillipCapital India Research

81.0

49.9

6.5

20.4

Fert Crop protection Non cropprotection

GM seeds

in US$ bn

Overall Size in FY17

10.0

5.1

0.82.50.3

Fert Crop protection (pre and post)

Seeds & others

in US$ bn

Overall Size in FY17

~17%CAGR

~7%CAGR

~12%CAGR

10 year CAGR

Fertilizers, 51%

Herbicides, 14%

Fungicides, 9%

Insecticides, 7%

Bio & other agro chem,

2%

Non crop protection,

4%

GM Seeds, 13%

Global

Urea, 40%

Phosphatic Fert, 16%

Other complex fert,

8%

Herbicides, 7%

Fungicides, 6%

Insecticides, 17%

Bio & other agro chem, 2%

Seed tech & others, 5%

Indian

Fertilisers63%

Indian industry is just 10% of the globalagro inputs industry



Leveraging on exports Favourable operational dynamics will lead to robust growth India is a low‐cost destination for manufacturing. Therefore, agro chemicals companies have been able to leverage inexpensive but high‐quality skillsets to strengthen their R&D infrastructure and create cost‐effective products that cater to major target markets such as Latin America, Africa, and APAC countries (other than China). Since the ‘agronomics’ in these target markets is similar to those in India, farmer affordability in these geographies to purchase innovator products from companies such as Bayer, BASF, and Syngenta, is low – this is the key driver for Indian agrochemicals exports. India: Exports revenue is growing above industry average vs. a global decline

Source: Company sources, PhillipCapital India Research Export prospects are driving agrochemicals growth In the past decade, Indian agrochemicals exports have achieved a significant CAGR of 16‐17%, much above the total agro‐inputs industry’s average of 11%, despite sluggishness in the global industry. This is because of: (1) pricing benefits (low cost solutions on shared technological capabilities and R&D strength for generic and off‐patented product manufacturing), (2) export incentives, (3) low adoption levels in domestic markets, and (4) low purchase capacity of domestic farm producers. Key geographies addressed by Indian players UPL CRIN PII EXCC Rallis India

N America US

Canada Mexico

Latin

America Brazil

Argentina Chile Others

APAC

North Asia* Indian Subcontinent (ex India)# S.E.A ANZ

EMEA

West Europe South Europe ME Africa

Source: Company *North Asia accounts to Russia, China, Japan and South Korea

114

13 2

133

14 3

148

164

170

186

0

50

100

150

200

UPL PII EXCC

Rs bn

FY16 FY17FY18E FY19E

Major agrochemical exporters in Indiahave successfully expanded to thosegeographies where farmer affordabilityis low

Indian agro chemical exports outgrewthat of global industry average



For fertilisers, technological and economical deficiencies in the Indian industry have formed a barrier to its export capabilities. In addition, sourcing dynamics of key ingredients for high‐quality fertilisers also play a key role in the non‐feasibility of fertiliser exports. Majority of India’s fertiliser production capacities are with public‐sector companies, who are mandated against and counter‐incentivised for exports. Failing global agro‐chem oligopoly is a strong opportunity for India In the global agrochemicals industry, about 70% market share is held by just four majors (there were six earlier, but they went through consolidation; they had about 80% market share 6‐7 years earlier). These majors are: Dow‐DuPont, Bayer‐Monsanto, CNC‐Syngenta, and BASF; they are innovators of new agrochemical molecules and they dictate the technological shift of a variety of agrochemicals.

How oligopoly has played out…

Source: PhillipCapital India Research, Philip Mcdougall As seen in other industries (such as IT, manufacturing, and engineering) in India, in agrochemicals, too, offshoring efforts for cost‐effective solutions have picked up significantly. Over the past decade, while innovators lagged in terms of growth, global business of off‐patent players showed significant growth in market share. Cost‐effective solutions are in huge demand in the current evolving ‘global agronomics’.

DOW

Du‐Pont

DuPont (US)Barranquilla

Propanilbusiness

Trifluzamidebusiness

Tebufenozidebusiness

Rohm & Haas

Dow Agrisciences

DowElanco

Acquisition/holding

Divestment/disposal

Merger

MonsantoMonsanto (US)

Herbicides (Japan)

6%

Bayer CropSciences

HouseholdInsecticides

Bayer

Aventis

Agrevo

Schering

Hoechst

Aventis

Everest

17%

Syngenta

Astrazeneca(Crop

Protection)

AstraZeneca

CerealFungicides (NORDIC) Mikado

herbicides

Taufluvalinate & Propaquizafop brands

FlutrinafolFungicides

Novartis(Crop

Protection)

Merck Novartis

SandozCiba Geigy

ChemChina

18%

Fiprinol, Enthiprol & others

Seeds

BASF

TerbufosInsecticide

PhanoxyHerbicides

SorexBASF

BASFGermany

Cynamid(AHP)

Cynamid

Shell(Agriculture) 11%

5%

8%



…and how the oligopoly is losing its hold

Total Market: 2014 Total Market: 2016 Sales (US$ mn) % Sales (US$ mn) %

50.5 80% Top 8 (now Top 6) 41 73% 2.0 3% UPL 2.5 4% 10.7 17% Others 12.9 23% 63.2 Global Market 56.4

Source: Philip Mc Dougall Indian companies, with their focus on off‐patent molecular R&D, have created more resilient combinations that cater to these fast‐growing economies. Exorbitant costs to discover and commercialise new molecules, coupled with tightening regulations across the world, have disrupted the innovation rate – eventually, this has made it tough for oligopolies to achieve cost efficiencies. Share of off‐patent chemicals increasing exponentially – indicates low innovation

Source: PhillipCapital India Research The recent consolidation effort by top‐4 players and M&A actions (which led to the formation of four global innovators – Bayer‐Monsanto, Dow‐Dupont, CNC‐Syngenta, and BASF) — shows their desperate attempt to bring in operational efficiencies and pricing power in major markets. Largely in end‐to‐end crop solutions, these giants have the technological capability to create products that have higher efficacy when used along with their modified variants of seeds and enhancement products. For example, Dow’s seeds work more efficiently with their plant enhancers and protection chemicals. Expect revival in global demand based on exponential growth in CSM orderbook, order log volumes for tech‐grade exporters In the last two years, major indicators – such as: (1) order logs from global vendors, (2) the build‐up in the order pipeline for custom synthesis and manufacturing (CSM), and (3) management confidence – signals a change in demand scenarios in major western markets. Indian companies have seen renewed spending on agro inputs by

Top 8 (now Top 6)80%

UPL3%

Others

17%

2014

Top 8 (now Top 6)73%

UPL4%

Others23%

2016

35% 30% 24% 23% 23% 21% 20% 18%

35%33%

25% 25%18% 21% 20% 17%

30% 37%52% 52%

59% 58% 61% 66%

CY00 CY05 CY10 CY11 CY13 CY14 CY15 CY16

Patent Proprietory off‐patent Off‐patent



global farmers and easing regulatory policies across major geographies promoting higher agriculture production. A few players – PII, EXCC, and UPL – who are either in direct competition or are major suppliers of global innovators, have seen increased order‐log volumes and custom synthesis orders from clients for new/combination products. This directly indicates higher demand from their end consumers. Exponential growth in CSM orderbook – a key indicator of global demand revival

Source: Company, PhillipCapital India Research Additionally, PII’s CSM orderbook also indicates significantly higher order logs for new products. The management claims this to be an indication of a revival in innovation, and that more innovators are offshoring R&D and manufacturing capabilities to low cost regions to avail cost efficiencies. Note that the orderbook displayed in the table above indicates the total order logs, including those that are yet to pass the feasibility and acceptance phase (just after discovery of new molecules/products). This indicates strong demand from PII’s global clientele (innovators such as BASF).

395

435 520

520

578

600

613 78

0 850

850

800

800 1,000

1,000

1,000

1,150

0

200

400

600

800

1,000

1,200

Q4 FY14

Q1 FY15

Q2FY15

Q3 FY15

Q4 FY15

Q1 FY16

Q2FY16

Q3 FY16

Q4 FY16

Q1 FY17

Q2FY17

Q3 FY17

Q4 FY17

Q1 FY18

Q2FY18

Q3 FY18

US$ m

n

Order book size

To start playing out from Q3FY19 onwards



Revival in domestic market: GoI to be major enabler For Indian agro‐input players, India remains a key market with 50‐60% of revenues derived from the country, agro‐chem and fertilisers combined. GoI is the key enabler of modern farming methods and the section below will look at key drivers that indicate a positive trend reversal in the growth and operational dynamics of the agro‐inputs industry, leading to higher value generation. Agro inputs: Revenue CAGR in the last decade Exports‐to‐domestic ratio for major agro‐input players

Source: PhillipCapital India Research *N.U – non urea fertilisers Fertilisers: Technological and economic deficiencies This segment is dependent on the domestic markets with near‐proximity states as their key markets. Technological and economical deficiencies in the Indian fertiliser industry form a strong barrier to its export capabilities. In addition, the sourcing dynamics of key ingredients for high‐quality fertiliser products also plays a key role in the non‐feasibility of exports of fertilisers. This is largely a policy dependent and a highly government controlled industry, counter incentivised for exports. Key beneficiaries in major agro‐producing states in India Major agro states Fertilisers Crop protection Uttar Pradesh ‐ National Fert Ltd

‐ Fert Association of India ‐ Chambal Fertilisers and Chemicals ‐ Hindalco Industries ‐ Indian Farmers Fert Co‐op ‐ Krishak Bharat Co‐op

‐ Bayer Crop Sciences ‐ PI Industries

Punjab ‐ Chambal Fert & Chem ‐ Fert Asso of India ‐ RCF ‐ GSFC ‐ GNVFC ‐ Zuari Agro ‐ Tata Chem

‐ UPL ‐ Bayer Crop sciences ‐ PI Industries ‐ Rallis India

Madhya Pradesh ‐ Coromandel International ‐ RCF ‐ Nagarjuna Fert ‐ Deepak Fert ‐ Tata Chem ‐ Zuari Agro

‐ Bayer Crop sciences ‐ PI Industries ‐ Rallis India ‐ Excel Crop care

Rajasthan ‐ Chambal Fert & Chem ‐ Fert Asso of India ‐ RCF ‐ GSFC ‐ GNVFC

‐ UPL ‐ Bayer Crop sciences ‐ PI Industries ‐ Rallis India

17%

7%

13%

Top 5 ‐ Agrochem Top 5 ‐ Fert (N.U*) Top 4 ‐ Seed Tech

Rev CAGR in a decade

80%60%

25% 28% 27%43% 37%

20%40%

75% 72% 73%57% 63%

UPL PII Rallis EXCC NACL CRIN DEEPAK N

Export rev % Domestic rev %



‐ Zuari Agro ‐ Tata Chem

Maharashtra ‐ Coromandel International ‐ RCF ‐ Deepak Fert ‐ Tata Chem ‐ Zuari Agro

‐ UPL ‐ Bayer Crop sciences ‐ Rallis India ‐ Excel Crop care

Gujarat ‐ Chambal Fert & Chem ‐ Fert Asso of India ‐ RCF ‐ GSFC ‐ GNVFC ‐ Zuari Agro ‐ Tata Chem

‐ UPL ‐ Bayer Crop sciences ‐ PI Industries ‐ Rallis India ‐ Excel Crop care

Karnataka Mangalore Chem & Fert Ltd RCF Zuari Agro Coromandel International Deepak Fert Tata Chem

‐ UPL ‐ Bayer Crop sciences ‐ Rallis India

Andhra Pradesh Coromandel International Nagarjuna Fert

‐ UPL ‐ Bayer Crop sciences ‐ PI Industries ‐ Rallis India ‐ Coromandel International

Source: Company sources, PhillipCapital Research Overall installed capacities for fertiliser production across India Type of Fertiliser No. of installed Units Total Installed Capacity (Lac MT) Urea 31* 242 DAP 12 70 SSP NA 102 Complex Fertilisers 21 52

Source: Department of Fertilisers, GoI

*FACT‐Cochin and DIL Kanpur are under shut down, **Complete requirement of Potash is imported Agrochemicals (crop protection, pre‐ and post‐harvest) Among agrochemicals players, Bayer Crop Sciences and UPL hold about 38% market share (combined) across India, followed by other branded players such as PI industries, Rallis India, BASF, Excel Crop Care, and Coromandel’s agro‐chem business (among listed players). Introduction of new products and expansion into variety of crops have been major growth drivers for this industry in the past five years. Agrochemicals companies encounter significant challenges in the domestic markets such as: (1) Indian markets are scattered and rural income is low vs. other leading producer countries, (2) past bad experiences due to spurious chemical blends have made stringent in terms of health safety, and (3) unawareness about new products and right usage methods by farmers. Government authorities, along with major players (UPL, CRIN, PII) have started ‘awareness creation’ campaigns and education platforms for Indian farmers, which have yielded value over the past 4‐5 years. These players expect such drives to create more inroads into the untapped markets, and also accelerate the adoption of agrochemicals to protect harvest loss.



Currently, spending on agrochemicals is low across the board. However, better spending mix tends to increase yields

Source: CACP data, Directorate of Economics & Statistics, Ministry of Agriculture & Farmers Welfare The section below on ‘Indian agriculture’ addresses the key challenges faced and growth drivers influencing reversal of domestic consumption of agro inputs.

3.02.7

1.9

3.1

3.8

2.7

3.22.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0%

5%

10%

15%

20%

25%

AP KA MH HR PJ WB TN KL

PaddySeeds Fert & ManurePesticides & allied Yield (MT per ha)

Balanced spend mixyielding strong

2.83.0

1.2

4.04.3

2.8

2.3

2.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0%

5%

10%

15%

20%

25%

GJ RJ MH HR PJ WB UP MP

WheatSeeds Fert & ManurePesticides & allied Yield (MT per ha)

Lowest spends on spec nutrients, crop protection chem and enhancers

Scope for better spend mix & betteryields

1.1

0.7 0.8 0.7 0.7

1.0 1.0 1.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0%

5%

10%

15%

20%

25%

30%

35%

AP KA MH RJ UP MP BH CH

GramSeeds Fert & ManurePesticides & allied Yield (MT per ha)

Depending on the cropping alignments and requirednutrient mix to decide better yields for Gram

Scope for better yields

0.6

2.2

0.8

1.2 1.2

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0%

5%

10%

15%

20%

25%

30%

35%

AP GJ KA MH OR RJ

GroundnutSeeds Fert & ManurePesticides & allied Yield (MT per ha)

Scope for better yields



Indian agriculture: Growth drivers and risks Agriculture continues to maintain its stronghold in our country’s socio‐economic framework. Contributing about 14% to Indian GDP (~US$ 320bn), agriculture provides economic sustenance to nearly half the of country’s population, even as it shoulders the responsibility of providing food security and nutrition balance. The Indian agro inputs industry should play a major role in Indian agronomics, based on: (1) refinements in technological capabilities and the knowledge base of the industry, and (2) higher investments in improving R&D capabilities in crop protection, seed‐tech, and soil nutrient space – in that order. Almost 49% of the total rural workforce in India is into agriculture

Source: NSSO, Directorate of Economics & Statistics India has the largest arable landholdings in the world (at 154.0‐156.5mn ha) and employs the largest agricultural workforce (about 240mn). We believe that: (1) improvement in the current yields towards the global average, and (2) reducing the crop losses from current levels of 35‐40% to the global average of 15‐20%, would lead to higher net exports across all variety of crops produced, bringing higher realisations per MT. Addressing trend changers in the Indian agronomy: GoI to play a major role The government of India has played a significant role in bridging the gaps in the agricultural infrastructure and protection of all stakeholders of the industry while gradually alleviating the risks and challenges involved. Several progressive policy measures are all set to positively change the dynamics of India’s agriculture, including – bringing additional areas under major irrigation projects, promoting micro‐irrigation and precision farming, direct benefit transfer of subsidies through controlled digital methods, mandatory soil‐health cards, financial inclusion, crop‐insurance schemes, and developing agro‐infrastructure like storage and processing facilities. Immediate factors influencing the reversal in domestic consumption We expect a reversal in the agro‐input consumption trend in the country due to three major factors: 1) GoI’s emphasis on doubling rural income by 2022, putting pressure on improving

per hectare yields in the country, by: a. Emphasis on income protection. b. Direct socio‐interaction initiatives to impact farming patterns and spends.

2) Focus on balanced soil nutrition consumption improving the fertility levels and crop‐rotation of many major markets, by: a. Easing freight subsidy policy to support expanding markets for fertiliser players b. De‐linking subsidies from over‐utilised resources through DBT to promote

balanced fertiliser purchase/consumption per farmer; and

398

459460 474 480 485

238269

245 232 235 238

59.858.5

53.248.9 49 49

0

10

20

30

40

50

60

70

0

100

200

300

400

500

600

1999‐00 2004‐05 2009‐10 2011‐12 2014‐15E 2016‐17E

%Mns

Total Rural Workforce (TRW) Agricultural Workforce% share of Agri to TRW

Irrigation facility is available for 57% of arable lands, while the other 43% remain exposed to the vagaries of erratic rainfall As per global experts such as IMF andFICCI, India uses 2‐3 times more water per MT (for the same crops) than China and Brazil, who also have more yields per ha. This displays India’s lower adoption to modern inputs and techniques

The country ranks first in the production of pulses, oilseeds, and commercial crops, second in fruits and vegetables and sugarcane production (both of which are largely consumed domestically), and third in seafood exports (first in shrimp exports)

8‐9% of India’s total working population constitutes agri‐dependent business owners, mediators, and intermediaries, in addition to the unskilled labourers



3) Transitioning needs of the Indian populace to a more nutrition‐based diet. Emphasis on income protection to lead incremental farm investments The government’s ambitious goal of doubling farmer income by 2022 can prove to be a major enabler of farm productivity and farmer prosperity. Initiatives by GoI to improve farm spends/investments

SL No

GOI initiatives Logical impact

1 Financial inclusion of the rural population ‐ Leading to transparent and secure transfer of stimulus' like subsidies on inputs and insurance money against crop losses etc.

2 Focus on agricultural marketing and processing areas. Development of storage facilities in conjunction with the processing areas

‐ As per the Dalwai committee's report (doubling rural income), GoI has emphasised on agricultural marketing and processing areas, similar to APMCs and eNAMs, where farmers could achieve higher realisations. ‐ In addition, storage facilities are also to be revamped to preserve the harvest.

3 Crop insurance schemes under Pradhan Mantri Fasal Bima Yojana

‐ GoI quadrupled the capital allocation for crop insurance to ~Rs 130bn in three years from Rs 30bn in 2015. ‐ A major factor – securing the farmer's interest and his confidence on farm investments / spends

4 Higher focus on expansion of coverage area under major irrigation projects

‐ Increased access to irrigation delinks arable land from erratic rainfall. ‐ Have improved the coverage to 57% of farmlands in the last decade from 46%.

5 Micro irrigation projects ‐ Promotion of micro irrigation to additionally support crop lands using medium levels of water. ‐ The move is to stabilise yields from the under‐irrigated small‐to‐medium farms

6 Mandatory Soil Health Cards ‐ Soil Health Cards to capture farmer's agro input consumption data, which could indicate usage patterns. ‐ To capture the soil health by testing various farmland samples. ‐ Both together could enable the GoI to control the soil‐nutrition balance and educate farmers on other crop protection and yielding methods

Source: Budget, PhillipCapital India Research Initiatives securing farmers’ assurance in protection from crop losses and increased income margins through MSPs provide greater headroom for farmers to spend more on high‐yielding agro‐inputs and equipment, leading to a cyclical trend change in yields per hectare in the country. Direct socio‐interaction initiatives to impact farming patterns and spends As an initiative to improve awareness of the new scientific methods for crop protection, farm mechanisation, etc., state governments, along with local agro inputs players have created panels for direct socio‐interaction platforms to communicate directly with the farm producers in each taluka. These platforms would be a direct link for educating farmers about various methods of high‐yield farming and schemes/initiatives by the central and state governments. Simultaneously, these platforms would understand their changing needs and necessities, which could eventually influence policies.

For example, Coromandel, together with the AP and Telangana governments, created socio‐interaction panels to promote its products along with educating farmers on various farm‐upgradation techniques. The AP government also created a co‐venture with Coromandel to supply farm equipment such as tillers on rent, to boost the use of farm‐machine equipment by small farm producers.



Easing freight subsidy policy to support expanding markets for fertiliser players The distribution in the market share of domestic sales of fertilisers – urea and NPK – was largely influenced by freight subsidies, which dictated the proximity (within 1,400km) of manufacturing facilities to the markets (beyond which subsidies were inapplicable for freights). These subsidies also established local players as beneficiaries of their near‐proximity markets. However, a recent move by the GoI allows companies to supply across each state (interstate) (beyond the specified proximity limit) – this provides huge growth potential for branded fertiliser revenues. Delinking subsidies through DBT to create balance among fertiliser inputs For farm producers, the choice is not necessarily based on expected yields or their preference for a higher‐yielding farming method. Rather, it depends on the affordability of farm inputs. With urea being available at about Rs 300 per bag (largely influenced by subsidies) versus NPK products at about Rs 1,000 (average) per bag, ratios of soil nutrition levels have worsened to as high as 40:17:1 in certain states from the ideal levels of 4:2:1. This has led to degradation of soil fertility. Key producing states such as PJ, HR, and UP have a worse soil nutrient ratio

Source: PhillipCapital India Research, Department of Fertilisers The GoI has initiated the Direct Benefit Transfer (DBT) scheme with a vision to provide relief to fertiliser companies and eliminate pilferage in the transfer of benefits to farmers. Reports and our sources suggest that the rollout is about 95% complete by February 2018. The government expects to settle claims within a week of capturing consumption data on retailers’ POS (point‐of‐sale) systems. Reduction in fertiliser subsidies across the board Trending towards de‐subsidisation…

Source: PhillipCapital India Research, Department of Fertiisers, Company presentations, Industry Analysis

40 34 21 7.8 73.6 3 4

17 13 83.2 3

2.4 22

1 1 1 1 1 1 1 1

PJ HR UP All‐India avg

AP‐TS KA MH Ideal ratio

Nitrogen Phosphorus Potassium Leading agro inputs market

1,000

850

810

810

778

700

658

565

555

563

445 480

185

159

159

159

125

125

0

200

400

600

800

1,000

1,200

FY13 FY14 FY15 FY16 FY17 FY18E

Rs / bags

Urea Phosphatic fert (DAP and AP blend) SSP

63% 60% 52%37% 35% 35% 34% 27%

37% 40% 48%63% 65% 65% 66% 73%

Pre NBS FY11 FY12 FY13 FY14 FY15 FY16 FY17

Subsidy % to total realizationFixedMRP Fixed subsidy & variable farm gate prices

Degradation of soil fertility: with urea available at about Rs 300 per bag (therefore overused) versus NPK products at about Rs 1,000. Soil nutrition levels have worsened.



Fertiliser companies calculate that (after the current market inventory is completely flushed out over FY18‐19) this initiative will lead to a gradual decline in the subsidy burden on companies, bringing in strong cash‐flow efficiencies and benefiting balance sheets over FY19‐20. We believe that the trajectory of the recent move will end up in ‘de‐subsidisation’ of fertilisers. This shall bring price parity among urea and other NPK fertilisers. Additionally, this would help GoI to regulate soil nutrition levels by promoting the right consumption mix of urea and other NPKs. Transitioning demand of food requirements to a more nutrition‐based diet In the first Green Revolution, India became self‐sufficient in major food grains such as rice, wheat, and pulses and created surplus produce for exports. However, in the recent decades of 2000‐2017, there has been a significant shift towards the need for a nutrient‐based balanced diet, which requires additional investments by farm producers into newer food categories. Rice and wheat production growth: India is among the largest exporters

Source: Agricultural Statistics Report 2015‐16 In the last two decades, monthly rural consumption of fruits and vegetables have almost doubled to about 9kg per person from 5kg, while consumption of food grains has declined by 15% (at a combined level) to 12kg per person from 14kg. Monthly urban consumption of fruits and vegetables also indicated a growth of 50% (to 12kg per person from 8kg) in the same period, while food grain consumption declined about 15% (to 10kg per person from 11.5kg). Rural and urban monthly consumption of horticulture grew significantly, while food grain consumption declined

Source: Agricultural Statistics Report 2015‐16 Horticulture CAGR at 28%; herbicides, fungicides to be major agrochemicals drivers

0

20

40

60

80

100

120

1950

‐51

1960

‐61

1970

‐71

1980

‐81

1990

‐91

2000

‐01

2010

‐11

2014

‐15

2015

‐16

mn MT

Rice Wheat Pulses Coarse Cereals

14.2 13.612.8

12.0 12.0

5.36.3 5.8

8.59.2

0

2

4

6

8

10

12

14

16

1993‐94 1999‐00 2004‐05 2009‐10 2011‐12

kg/m

onth/person

RuralFoodgrains Horticulture

11.5 11.410.8

10.2 10.2

8.19.2

8.0

11.7 12.0

0

2

4

6

8

10

12

14

1993‐94 1999‐00 2004‐05 2009‐10 2011‐12

kg/m

onth/person

UrbanFoodgrains Horticulture



India is one of the leading exporters of fruits (~Rs 26.4bn) and vegetables (~Rs 12.2bn) with total exports of about Rs 38.6bn. The country accounts for about 16% of the total global production of fruits (~530mn MT) and about 18% of the total global vegetable production (~920mn MT). India produces a wide variety of spices such as black pepper, cardamom, ginger, garlic, turmeric, and chilly, and a large variety of tree and seed spices. The total production of spices was about 5.7mn MT. Horticulture production surpassed food grains in FY13

Source: Ministry of Agriculture & Farmers Welfare, DES Herbicides saw 50%+ CAGR over the past five years, due to the increased horticulture‐produce output, higher spending capacity of horticulture producers, and growing demand for a balanced nutrition diet in the country. With increasing fruit consumption (CAGR of 30‐40% in five years), fungicides are likely to follow herbicides with +30% growth.

231

234

218

245 259

257 265

252

252 27

6

211 215 223

241

257 26

9 277 281 285

300

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

mn MT

Foodgrain Horticulture

Horticulture has seen a volume CAGR of about 5% and the value of output grew by about 28% between 2008‐09 and 2015‐16. In the same period, food grains and other crops saw about 3% volume CAGR and the output value grew less than 10%



Design limits Indian agronomy’s adoption of modern farming This section addresses certain key challenges faced by the Indian farmer in adoption of modern farming techniques. India has one of the lowest ratios in agriculture vs. peers, with lowest mechanisation, lowest consumption of agro inputs, restricted seed engineering technology, and lowest yield per hectare. India loses 35‐40% agro produce to erratic monsoons, pests, and inadequate post‐harvest infrastructure Indian agriculture continues to remain heavily dependent on monsoons, despite the steady rise in irrigation facilities. Although the agricultural yield per hectare in India more than doubled over 2000‐2014 due to adoption of a few modern techniques (such as hybrid seeds and a variety of soil nutrients), the country has the least yield‐per‐hectare ratio among its peers, along with the worst crop‐loss ratio of 35‐40% (global average is 15‐20%). India has the lowest crop yield among its neighbours Major factors influencing crop losses in India

Source: World Bank, Country‐wise labor ministry data, Industry experts, Ministry of Agriculture A few key factors affecting the Indian farmer are: 1) High crop‐loss ratio due to inadequacies in key agronomic parameters, with a

major influence of: a. High dependency on monsoons b. Inadequate infrastructure for post‐harvest preservation

2) Economic infeasibility caused by: a. Scattered arable lands b. Scarcity of labour and peaking labour wages, and c. Proliferation of spurious products

High dependency on monsoons Indian farming has a strong correlation with rainfall in the country. As per the study done by FICCI and IMF, the country’s farming consumes 2‐3 times more water per MT vs. similar crops cultivated in peer countries ‐ Brazil, China. India has about 43% arable lands not covered under the irrigation projects.

10

9 8.5

8 8 8 8

5 4.6

4.5

4.4

4

3 2.5

0.8 118.511.8

154.6

6

119

23.580

7.8 1.3 30.4

156.5

0

20

40

60

80

100

120

140

160

180

0

2

4

6

8

10

12mn Ha

MT / H

a

Yield per hectare

Total arable lands

Pre harvest Pests

Monsoons Post harvest pests

Logistics and Storage

Soil degradation and other factors

7‐8%

12‐15%

5‐6%7‐8%

3%



Rainfall deficiency in June‐September 2010‐2014 indicates strong monsoon dependency

Source: PhillipCapital India Research, Met Dept #Despite erratic monsoons and irregular spatial distribution in FY16 and FY17, agriculture GDP showed a divergence from its trend (was better), even as commodity prices did not improve significantly, and the market realisations did not revive fully. This could be correlated to the increase in irrigation coverage and improving yields through adoption of good seed variants and supporting micronutrients across regions.

Inadequate infrastructure for post‐harvest preservation Three major factors disturbing gross realisations of farm produce: (1) loss of produce post harvest from pests, rodents, etc., (2) lack of proper storage facilities, cold chain logistics (for perishables such as vegetables and others), and (3) lack of adequate food processing infrastructure for some produce that has high potential for exports. While the overall food production and demand in the domestic markets shot up in the past decade, investments in post‐harvest infrastructure for storage and logistics did not keep pace because of low private participation and hectic registration/ approval procedures. Inadequate storage and proper logistics contribute 7‐8% towards annual crop losses

Source: Industry analysis, Ministry of Agriculture Gross yield of farmers’ has to be protected to support sustenance of food production across a variety of crops. Adoption of various crop‐protection methods, including application of agro chemicals for pre and post‐harvest use, creating central and local infrastructure in a ‘hub‐and‐spoke’ model for storage and warehousing, and adaptation to modern logistics methods should help eliminate about 20% of the overall crop losses (currently at 35‐40%) in the country.

1,108 1,111

991

1,124

945

893864

800

850

900

950

1,000

1,050

1,100

1,150

JJAS 2010

JJAS 2011

JJAS 2012

JJAS 2013

JJAS 2014

JJAS 2015

JJAS 2016

India avg rainfall (mm)

8.6%

5.0%

1.5%

4.2%

‐0.2%

2.0%

4.4%

8.9%

6.7%

4.5%

4.7% 7.2%7.9% 7.11%

17% 17% 16%15%

14% 14%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

‐2%

0%

2%

4%

6%

8%

10%

12%

FY11 FY12 FY13 FY14 FY15 FY16 FY17

Agri GDP grth Overall GDO grth Agri to GDP

Pre harvest Pests Monsoons Post harvest pests Logistics and Storage

Soil degradation and other factors

7‐8%

12‐15%

5‐6%7‐8%

3%

Factors influencing crop losses



Fragmented arable land leading to low adoption of modern methods The low adoption of modern farming methods by an Indian farmer is not entirely culturally driven. Highly fragmented arable lands per farm owner (< 2ha average size of land holdings for around 80% of operational farms), causing low return on investments (in turn poor spending capacity) on modern methods, limit the scope of Indian agronomics in terms of following global standards. Steadily declining arable land holdings in India and increasing fragmentation in average land‐holding size have resulted in poor yield per hectare. Poor yield resulting in low spending/investment capacity Low level of mechanisation, even among BRICS

Source: World bank statistics, Industry analysis, PhillipCapital India Research

Declining per capita arable lands Average size of arable landholdings now close to 1.1 ha

Source: Agricultural Census of India, Tata Strategic estimates The critical factors that influence adoption of mechanisation in the country are – evolving cropping patterns, availability and cost of alternatives for manual labour, and adequate access to financing these investments. Scarce skilled labor and over inflated wages ‘White‐collar job’ has become a popular employment choice for majority of Indians. Most Indian families view jobs that need hard labour and effort as lowly. For almost half of the Indian working population, agriculture is an ‘inherited’ employment rather than by choice. As such, more cultural methods are used in Indian agriculture rather than scientific ones. In addition, exponential growth in wages (labour) across India has taken a toll on the wafer‐thin margins earned by farm producers. Labour scarcity and an exponential increase in wages would force farm producers to seek alternatives – such as use of pesticides and farm mechanisations – which could be huge potential growth drivers for agrochemicals and farm‐equipment space.

10

9 8.5

8 8 8 8

5 4.6

4.5

4.4

4

3 2.5

0.8 118.511.8

154.6

6

119

23.580

7.8 1.330.4

156.5

020406080100120140160180

0

2

4

6

8

10

12

mn Ha

MT / H

a

Yield per hectareTotal arable lands 95% 95%

80%75%

65%

45%

2,927

2,150

329 224 320109 0

500

1,000

1,500

2,000

2,500

3,000

3,500

30%

40%

50%

60%

70%

80%

90%

100%

US Western Europe

Russia Brazil China India

US$ ‐mon

thly wages

Mechanization % Average monthly labour wage

0.34

0.150.135

0.08 0.07

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

CY1951 CY2001 CY2015 CY2025 CY2030

Per capita arable lands (Ha)2.28

21.84

1.691.55

1.41 1.33 1.23 1.16 1.12

0.00

0.50

1.00

1.50

2.00

2.50

1970

‐71

1976

‐77

1980

‐81

1985

‐86

1990

‐91

1995

‐96

2001

‐02

2005

‐06

2010

‐11

2015

‐16

Average size of landholdings (Census India)



Current per‐day farm wages in major states Wages trebled over seven years; GDP and GNI doubled State/UT Unskilled Semi‐Skilled Skilled Highly SkilledAP ‐ ‐ ‐ 896Gujarat 276 284 293 ‐Haryana 292 322 355 373Karnataka 290 305 330 333Maharashtra 315 ‐ ‐ ‐Punjab 277 297 332 371Tamil Nadu 456 ‐ ‐ ‐West Bengal 278 306 337 ‐Telangana 363 ‐ ‐ ‐Max wage 456 322 355 896Min wage 276 284 293 333Average wages 318 303 329 493

Source: Ministry of Labour & Employment, GoI, Directorate of economics & Statistics

Proliferation of spurious products impact farmers’ confidence on agro chemicals Poor demand‐supply and pricing dynamics in some segments of agro inputs in the country have led to proliferation of spurious products in the market with unknown effects on farm produce and soil. According to a recent survey by the Tata Strategic Management Group along with FICCI, non‐genuine products account for more than 40% of the market. Key factors that influence farm producers to procure such products, which could lead to gradual erosion of soil fertility and other damages, are: • Improper supply/distribution of genuine products in local markets. For example,

use of urea has been diverted by third parties for industrial purposes while demand for farming has peaked. To counter this misuse, GoI has mandated neem‐coating of urea imported for agriculture, making it non‐viable for other use.

• Lack of education and awareness among farmers • Inefficient and insufficient distribution systems • Long gestation period for introduction of new products

126

214281 305

187

282359 3621,090

1,4471,596

1,710

1,437

1,8582,104

2,263

0

500

1,000

1,500

2,000

2,500

0

100

200

300

400

500

600

700

800

2009‐10 2012‐13 2015‐16 2016‐17

Field Labour SkilledGDP per capita (US$) GNI per capita (US$)



Outlook Leveraging its recent strong operational and cost efficiencies, we believe that the Indian agro inputs industry is bound to go through a strategic shift in terms of technological advancements and capabilities – to offer low‐cost, high‐quality solutions for global requirements of high‐yielding products. This will lead to a rise in current valuations of agro‐input companies in the coming decade. This is what we believe will pan out: 1. Among all agro‐input players, we expect agrochemicals players to outperform in

the next 3‐5 years due to the unlocked potential in both domestic and exports markets.

2. More scope for the growth of NPK fertilisers (because of GoI’s focus on balanced soil‐nutrition consumption).

3. DBT will lead to unburdening of cashflows and deleveraging of balance sheets of fertiliser companies. There is a higher probability of ‘de‐subsidisation’ of fertilisers leading to transparent allocation of subsidies to farmers and bringing price parity to fertilizer products.

We expect policy and fiscal stimulus to be maintained in the government’s next term and a revival in global consumption of agro chemicals. Based on this, we initiate coverage on the agro‐inputs sector with an ‘Overweight’ stance and in the priority order as below: • Crop‐protection and integrated plays (export plays and higher domestic

adoption) • NPK fertilisers (DBT, GoI’s focus on balanced soil nutrition distribution, expected

gradual ‘de‐subsidisation’ segment‐by‐segment, price parity among products, and growing agronomic requirements)

• Seeds Transformation of Indian agro inputs

Source: PhillipCapital India Research

First Green Revolution

‐ Introduction of hybrid seeds and GM Cotton.

‐ Controlled fertiliser imports and sales.

‐ Hardly any crop protection products.

De‐controlling fertilisersRise of crop‐protection biz

‐ NPK fertilisers de‐controlled.‐ Change in urea policy; revised target for domestic production.

‐ Crop‐protection chemicals start gaining traction.

‐ Introduction of new hybrid seed varieties.

Export incentivisation,Innovation in soil nutrientsAwareness creation

‐ Agrochemicals exports gain strong traction.

‐ Technological reformation in the crop‐protection industry. Strong R&D.

‐ Fertilisers were laggards due to costlier inputs, lower subsidies.

‐ Seeds saw sluggishness in spends. Very low NPI.

Strong global footprintTechnology transformations in Indian agriculture

‐ Exports to lead growth. Agrochemicals space to compete with global leaders.

‐ R&D strength to boost CSM growth.

‐ Transformation of the industry to become a leading low‐cost innovator.

‐ Indian markets to see strong rural spends in agrochemicals.

‐ Introduction of regional varieties of seeds.

‐ High‐yielding cropping patterns.

‐ ‘De‐subsidising’ fertilisers.‐ Direct transfer of subsidies to farmers.

‐ Increased irrigation, warehousing, electrification, and processing infrastructure.

1970‐1989 1990‐1999 2000‐2017 2018‐2028



PC agro‐inputs universe Companies Rating MCAP

(Rs bn) Rev

(Rs bn)

YoY Growth EBITDA(Rs bn)

YoY Growth

PAT(Rs bn)

YoY Growth

___FCF to sales___

PER(x) FY20

EV/EBITDA(x) FY20 FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

UPL BUY 390 174.8 14% 16% 30.1 22% 17% 16.3 32% 24% 8% 4% 5% 14.6 9.1 PII NEUTRAL 119 23.4 14% 15% 5.5 16% 15% 3.9 20% 17% 9% 9% 8% 22.0 15.2 EXCC BUY 36 12.4 29% 28% 1.6 44% 32% 1.0 43% 34% ‐1% 1% 3% 19.0 11.5 CRIN BUY 156 112.5 13% 12% 12.5 23% 17% 6.9 30% 21% 5% 3% 5% 14.3 8.9

Source: PhillipCapital India Research Estimates Indian crop protection peers

MCAP (Rs bn)

Rev (Rs bn)

YoY Growth

EBITDA(Rs bn)

YoY Growth

PAT(Rs bn)

YoY Growth

___FCF to sales___

PER(x) FY20

EV/EBITDA(x) FY20 Crop protection players FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

Rallis India 45 18.6 13% 14% 2.8 20% 19% 1.8 21% 21% 6% 6% 8% 16.9 10.9 Dhanuka Agritech 29 9.6 14% 14% 1.7 18% 16% 1.2 15% 16% 12% 8% 9% 18.0 12.0 Bayer India 175 28.4 26% 7% 4.4 24% 20% 3.1 28% 16% 12% 7% 13% 37.9 27.0 BASF India 87 57.0 10% 11% 3.7 31% 20% 0.9 115% 43% 4% 3% 4% 31.1 16.1 Monsanto India 46 6.9 10% 16% 1.7 14% 11% 1.6 15% 18% 6% 14% 13% 21.7 19.4

Source: PhillipCapital India Research Estimates Indian fertiliser peers

MCAP (Rs bn)

Rev (Rs bn)

YoY Growth

EBITDA(Rs bn)

YoY Growth

PAT(Rs bn)

YoY Growth

___FCF to sales___

PER(x) FY20

EV/EBITDA(x) FY20 Fertilisers FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

Chambal Fertilisers 69 80.0 5% 25% 8.8 5% 74% 4.9 9% 31% ‐15% ‐4% ‐2% 10.0 7.1 Zuari Agro 21 72.6 3% 3% 5.6 2% 2% 2.1 8% 5% 17% 0% 1% 8.8 11.2 GSFC 49 58.0 14% 5% 5.2 33% 8% 3.9 23% 8% 9% 2% 1% 9.6 7.4 Deepak Nitrite 35 16.4 85% 15% 1.8 159% 27% 0.7 188% 30% ‐38% ‐10% 7% 13.9 6.7 Deepak Fert 27 57.0 11% NA 5.7 28% NA 2.1 51% 16% ‐4% 6% 1% 7.6 6.1

Source: PhillipCapital India Research Estimates PC Universe: Gross margins PC Universe: FCF cycles

Source: PhillipCapital India Research Estimates

49% 49% 50% 52% 52% 53%

41% 42% 42%44%

48% 49%

30%

37% 36%40% 41%

39%

24% 25%23% 24%

29% 30%

FY13 FY14 FY15 FY16 FY17 FY18P

Gross margins UPL PIIEXCC CRIN

‐10%

‐5%

0%

5%

10%

15%

20%

FY13 FY14 FY15 FY16 FY17 FY18P FY19E FY20E FY21E

UPL PII EXCC CRIN

Indicating strong investments on backward integration, expansion in capacities and product additions ‐ strong outlook for FY18‐21E



Key triggers for 2018‐21 and top picks Ticker Key triggers for 2018‐21 Our Reco UPLL IN • Revival in global agrochemicals consumption evident from industry veterans’ media statements.

• Scaling new product categories to expand potential market opportunity. Management expects herbicides and fungicides to lead the growth, both domestically and overseas.

• Unlocking strong free cash to offer capital adequacy; look for newer inorganic opportunities and support its plans to boost investments in innovation and pesticide intermediates capacity.

• Significant opportunities from molecules that came off‐patent recently; about US$ 2‐3bn worth of products to come off patent by FY19‐20. Being a first mover in the proprietary off‐patent space with strong R&D capabilities, UPL will benefit the most.

• Potential replacement opportunity of Monsanto's Glyphosate by Glufosinate (due to allegations of the former’s cancerous effects) and entry into Mid‐west US to drive revenues in North America.

• Strong government policy measures to revive domestic agro‐inputs consumption. Strong adoption of crop‐protection chemicals, already seen in the past decade.

• Advanta to cross‐utilise its seed technology across UPL’s global reach; yet to realise the full value of the business.

BUY (ADD), PO ‐ 950 (+24%)

CRIN IN • Largest phosphatic fertiliser brand in the country. Strong growth expected from SSP and AP‐DAP fertilisers due to expansion in regional marketshare.

• Retail business to offer better brand recall, majority breaking even. Strong brand‐building platform for CRIN in the Indian markets.

• Government’s policy revisions to aid strong SSP sales and expansion into newer territories of domestic markets for CRIN.

• Transformation into an integrated play opening up export horizons – in the crop protection chemicals and specialty nutrient space.

• Integrated play providing better realisations, leading to strong gross margins. • Backward integration focus to provide better margins. CRIN’s strategy is to invest more on a

robust supply chain for its fertiliser business. • Value unlocking expected in terms of reduction in working capital (with GoI's move to implement

DBT in fertiliser subsidy). We believe this move will lead to ‘de‐subsidisation’ of fertilisers.

BUY (MAINTAIN), PO ‐ 640 (+20%)

EXCC IN • Yet to realise the full potential of Sumitomo's backing. 9MFY18 already shows indication of exponential growth from the current base. Already among the top‐7 players in terms of size.

• Sumitomo will focus on offshoring incremental agrochemical manufacturing to India to avail benefits of low cost through EXCC – this will help boost bulk sales.

• Sumitomo will use EXCC’s strong brand recall, reach, and marketing capability in India, MEA, and other markets to expand its presence and portfolio in these regions.

• Expect strong investments (including capex) in FY18‐20, on new product capacities and expansion of the direct sales reach in its markets.

• Cross‐selling of products will benefit EXCC more. Expect higher price realisations to aid branded sales growth.

• We estimate a sales and PAT CAGR of 30% for FY18‐21 with upside surprises likely. Since Sumitomo holds 65%, it could intend to delist EXCC in a couple of years (this would allow it easier capital allocation and transfer of product IP).

BUY (MAINTAIN), PO ‐ 4000 (+21%)

PI IN • Largest CSM player in the Indian agrochemicals space. • Strong sales and marketing reach in India: +40,000+ retailers and +10,000 distributors. • In licensing of patent and proprietary patent products helped create strong brand. Not in the

generic space. • Catering to global innovators. Becoming a preferred vendor for CSM based on its strong R&D and

manufacturing capabilities and also the cost benefits that India provides. • Large R&D investments already in place to diversify into imaging and electronic chemicals in CSM

business. This could become a key trigger for the next rally in earnings growth and valuation. • Stock already valued at a premium of 50% to Indian peers and at a marginal discount to the

Indian subsidiaries of innovator MNCs.

NEUTRAL (ADD in lows),PO ‐ 940 (+9%)



Compa

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UPL (UPL IN) Competing with global giants... INDIA | Agro inputs| Initiating Coverage

17 April 2018

• UPL (erstwhile United Phosphorus) is India’s largest one‐stop crop‐protection solutions

provider, with leading domestic marketshare at 19‐20%; US$ 520mn of the US$ 2.6bn industry).

• Comprehensive portfolio of products closely trails global consumption patterns. • With strong sales and direct marketing (S&M) capabilities and brand re‐call in its major

markets, UPL continues to capture global market share. • UPL will benefit from a revival in global markets, where it will compete with global

majors based on its unique S&M‐focused business model, and robust R&D capabilities – to churn out high‐quality crop‐specific products. It will also benefit from the transformation in domestic consumption dynamics aided by government policy revisions.

Largest off‐patent Indian player with increased focus on exports UPL focuses only on off‐patent agro chemical products. This, coupled with strong R&D and manufacturing, allows it to churn out innovative combination products, target spectrum products, and extension of molecules into new crops. It has a strong domestic footprint and has expanded its global reach, targeting ideal markets after evaluating the demand for its products. UPL is the only domestic company to establish a strong S&M base in major exports markets, from where it derives 82% of its revenues (both organic and inorganic). We understand that for formulations in agrochemicals (a direct sales business), branding and front‐end sales are the key to success – and UPL has been able to do this because of consistent investments in these geographies (its Indian peers are still following suit).

New product introductions (NPI) + integrated crop‐science tech = strong market hold UPL is fully integrated across crop‐science phases; therefore, it is poised to compete with global majors on their turf, backed by strong R&D and a grip on technology. It is the first‐mover in the ‘proprietary’ off‐patent space; so, it is capable of addressing this space quicker than its peers. This opens up a potential opportunity of US$ 2.5‐4.0bn worth of patents expiring by FY21. Additionally, through Advanta, UPL shall bring in strong client stickiness, engineering its products to be more efficient with each other (seeds from UPL yielding better results with its agrochemicals products). Advanta also offers immense growth potential through geographical expansions (50+ potential countries) leveraging on UPL’s direct reach and cross utilisation of crop technologies across addressed geographies.

Herbicides and fungicides are major drivers, Glufosinate will boost US revenues With new horizons opening up for UPL (mid‐west US which is about 40% of the US agrochemicals market and southern Europe with its new fungicide product launches), UPL’s continued NPI in both the categories have already started yielding results. We expect contribution from these areas to double in the next 3‐4 years. Additionally, expected replacement of Glyphosate with Glufosinate in the US (due to allegations that the former is carcinogenic), are expected to yield about US$ 150mn worth of revenues in the next three years for UPL.

Outlook and Valuation With the right strategy and investments in place, UPL has built strength, delinking external dependencies and set to find new horizons to grow its business. With better cash‐flow generation, its acquisitions paying off strongly and reduced interest burden through better debt instruments, we expect UPL to deliver profit CAGR of about 25‐27%, with a recovery in EBITDA margins to about 19% from 17% in FY18, in the next three years. With strong conviction about higher acceptance for its new products, its expansion into newer regions, and with Advanta becoming a key play, we initiate coverage on UPL with a BUY rating and a target of Rs 950.

BUY CMP RS 764 TARGET RS 950 (+24%) COMPANY DATA O/S SHARES (MN) : 508MARKET CAP (RSBN) : 389MARKET CAP (USDBN) : 5.952 ‐ WK HI/LO (RS) : 902 / 675LIQUIDITY 3M (USDMN) : 20.1PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 27.8 27.9 27.9FII / NRI : 39.9 41.0 42.2FI / MF : 11.2 10.7 10.8NON PRO : 2.8 3.6 2.5PUBLIC & OTHERS : 18.3 16.9 16.7 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 6.0 ‐0.4 5.1REL TO BSE 2.6 0.9 ‐11.3 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20ENet Sales 174,817 199,278 230,904EBIDTA 30,134 36,746 43,008Net Profit 16,337 21,494 26,728EPS, Rs 32.0 42.1 52.4PER, x 23.8 18.1 14.6EV/EBIDTA, x 13.7 11.2 9.4P/BV, x 4.5 3.8 3.1ROE, % 20.3 22.6 23.3Debt/Equity (%) 66.1 52.4 41.3

Source: PhillipCapital India Research Est. Varun Vijayan (+ 91‐22‐6246 4117) [email protected]

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UPL BSE Sensex


UPL INITIATING COVERAGE

Comprehensive portfolio, unique formulations UPL is the second‐largest off‐patent agrochemical player globally. Unlike its industry peers, it focuses only on off‐patent molecule‐based off‐shoot agrochemicals products. This, coupled with its strong R&D and manufacturing capabilities, allows it to churn out innovative combination products, a high‐efficacy products, target spectrum products, and extension of molecules into variety of crops. It addresses all the categories of the agrochemicals crop‐protection segment and its product mix closely follows the consumption pattern in each region. UPL’s strategy is to launch at least two new products from its R&D stable every year (it has about 200 patents in its kitty) with unique applications (as in, the new products will address crops that not currently addressed). Since 2014, the management closely tracks the innovation rate (contribution of new innovative products to sales) in its product portfolio, and this has grown sharply to about 15% in FY17 from just 2.5% in FY14; it sees this ratio sustaining. It defines its ‘innovative products’ as those that are newly introduced by its R&D stable. They are no longer considered as such once their lifecycle crosses five years. UPL – Revenue breakup

Source: Company, PhillipCapital India Research Innovation rate vs. R&D expenses

Source: Company, PhillipCapital India Research Agro activities Agrochemicals continue to form a large portion of UPL’s revenues with 81% contribution (Rs 143.5bn) to overall sales (Rs 177.1bn in FY18) –14% CAGR over the past five years. It has a wide and comprehensive portfolio of products to address a variety of crop solutions required by the markets that it addresses. Herbicides and fungicides are the company’s largest contributors in terms of size, closely following the global ratio of products sold (44 herbicides : 27 fungicides : 22 insecticides : 7 others).

UPLRev ‐ INR 1,771bn

Fungicides29%

Agro Activities (96%)

Industrial Chemicals as Byproducts

4%

Herbicides29%

Insecticides23%

Seeds (Advanta)

10%

Other Agro inputs5%

2.5%5%

14% 15% 15% 15%1.5%

2.0%2.2%

3.1% 3.2% 3.2%

0.0%

0.5%

1.0%

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2.5%

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8%

10%

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16%

FY14 FY15 FY16 FY17 FY18E FY19E

Innovation rates R&D expense to sales

Second‐ largest off‐patent agrochemicals player in the world (after Adama) with about 4% global market share

UPL’s kitty: 1,415 formulations, 200 granted patents on molecular modifications, and 5,934 registrations

Branded play is the bigger game in agrochemicals – branded products account for 86% of UPL revenues

UPL has a global brand presence with direct reach in 80+ countries and overall footprint in 130+ countries



Product portfolio in all segments of agro inputs UPL CP solutions Seeds Herbicides Insecticides Fungicides Fumigants & storage solutions Speciality post‐harvest Key products Sorghum Propanil Acephate Mancozeb Aluminium Phosphide Natural coatings

Corn Metribuzin Imidacloprid Copper Magnesium Phosphide CIPC Canola Glufosinate Bifenozate Sulphur

Sunflower Pendimethalin Flonicamid Vegetables S‐Metolachlor

Key brands Advanta Stam, Tricor Lancer Gold Manzate Weevicide Oorja Alta Devrinol Ulala Vondozeb Quickphos Pacific Fascinate Phoskill Microthial Golden Lifeline Batus Gold Unizeb Gold Nutrisun Satellite Banter Glory

Lagaam BB20 Saathi TBCS40 Mocasin Saaf

Product % to sales (FY17) 10% 29% 23% 29% 5%

Source: Company UPL entered into seeds technology by acquiring Advanta, which fully merged with the parent company in FY17. It has been adding new products and technologies in the innovative category through its in‐house capabilities as well as through the inorganic route. Over the past decade, the company has made about 12 M&A investments, all of which were consolidated by FY17, and yielding strong results. It has also created brands around plant growth and regulatory products – such as Saaf, Doom, and Samar. UPL’s inorganic journey

Source: Company With the mandate of being a total crop solutions provider, UPL invested in other value‐add solutions, eventually building brand value in its critical markets. It currently addresses adjacent technologies in seed treatment, drought mitigation, biological and bio‐pesticides, bio‐activators and adjuvants, crop nutrition, soil health, and vector control. In addition to pre‐harvest crop protection solutions, it also offers post‐harvest solutions, enhancing marketability and farmer yields (such as phosphine



fumigation and Decco (decay control) for perishable food preservation and transportation).

Non‐agro activities Non‐agro activities form 4% of the total sales, largely constituting industrial chemicals and speciality chemical products. This is purely a non‐core activity for the company and it has made no incremental investments into this in the last five years.

UPL addressing end‐to‐end product lifecycle In the lifecycle of agrochemical products, there are three stages in manufacturing: 1. Active ingredients 2. Technical‐grade agrochemicals 3. Formulations UPL has the resources and capability in all three stages. With a strong focus on off‐patent molecules, it has both back‐end and front‐end integration for the complete lifecycle of its products. It also has a strong R&D platform to create varied product types through: (1) combination of molecules to improve efficacy (combination products), (2) improving spectrum of products, and (3) extension of molecules into a new variety of crops.

UPL continues to eat into the market share of global leaders; its market share improved to 4% globally from 3%, due to its growing and wide product portfolio, strong R&D capabilities, and end‐to‐end product integration. This, despite the global agro‐crop‐solutions market shrinking to US$ 56bn in 2016 from US$ 63bn in 2014.

Early mover in off‐patent production Every patented new molecule remains protected under patency rights for 10‐15 years – in which period the innovators enjoy maximum revenue generation. After this period, generic manufacturers start reverse engineering the chemical process used to prepare these molecules. UPL, which is a pioneer in the production of off‐patent chemicals, has better capabilities (research, testing, and development of these molecules and producing them in their facilities). However for UPL, there remains a latency period of 2‐3 years (for other players this is usually 3‐5 years) due to extensive research requirements on chemical processes and components used to

Active ingredients Technical‐grade Formulations

• Active Ingredients are createdthrough years of research and testsin a controlled environment.

• This phase has a high entry barriersince it is heavily capital intensivedue to the required R&D andregistration / testing setup, andenvironmental and othercompliances.

• UPL has the capability of formingnew combinations of off‐patentmolecules and has a fully captivesystem for majority of its facilitiesacross the globe.

• AI is manufac tured in its 13domestic facilities and exported (asneeded).

• Technical‐grade agrochemicals(TGAC) are a combination of A I(single or multiple) withintermediates, solvents, etc.

• Entry barriers are high because ofhigh capex requirements, longregistration, certification andcompliance processes.

• UPL generally ships TGAC productsin bulk form (200‐250kgpackaging), which is used by itscaptive‐formulation facilities forthe end product.

• These products are also procuredby third‐party formulators acrossthe globe. In UPL’s case ‐‐ in a fewAPAC and African countries.

• Formulations is a low‐entry‐barrierbusiness with low capexrequirements.

• In the formulation stage, theTGACs are converted into a dilutedand usable form of end products,by adding emulsifiers and othersolvents to reduce theconcentration of the product.

• UPL has about 16 formulationfacilities across globe to create theend product. This also helps thecompany to have direct brandaccess into these markets



develop these products, in which the innovators continue to hold market share (this period is called ‘proprietary off‐patent’). Off‐patent share is increasing exponentially, indicating low innovation

Source: PhillipCapital India Research UPL prepares these off‐patent molecules and creates innovative product combinations to add to its portfolio. As against its peers who fall in the category of generic manufacturers, UPL has the advantage of taking a leap directly into these products’ markets – i.e., it directly vies for market share.

Advanta: Focus on cross‐selling crop technologies to drive growth UPL’s strong entry into the seed technology space was marked by its majority investment in Advanta Seeds in 2006. Advanta (recently amalgamated into UPL), with its leading‐edge technology in seeds, address over 13 major crop varieties across the globe in 50+ countries. Its key differentiator is its R&D capabilities, with 16 research stations, two biotech centres, and a strong skill‐pool with 60+ years of research experience in plant genetics. Advanta: Product portfolio and regions addressed Major crop varieties India Asia North Am South Am Europe ANZ Africa Key brands

Rice Advanta

Corn Advanta, Pacific Seeds, Phoenix

Forages Advanta, Alta Seeds

Sunflower Advanta, Pacific Seeds, Alta Seeds,

Soybean Advanta, Vereda

Grain Sorghum Advanta, Pacific Seeds, Alta Seeds

Canola Advanta, Pacific Seeds, Alta Seeds

Wheat

Advanta

Vegetables Advanta, Golden Seeds

Source: Company Before the acquisition, Advanta lacked the right distribution capabilities for its products due to capital and R&D constraints. UPL acquired Advanta, and amalgamated it under a single balance sheet – this opened Advanta’s reach to 130+ countries and provided it access to UPL’s direct marketing force across 80+ countries. Advanta is yet to realise its true potential by expanding into UPL’s geographies and cross‐selling its seed technology in the markets that it currently does not address; it is also yet to bring its crop technology to all geographies. For example – while Advanta supplies seeds for wheat crop in Australia, it could now also target China, EMEA, and North America (who are large producers of wheat) with its R&D capabilities.

35% 30% 24% 23% 23% 21% 20% 18%

35%33%

25% 25%18% 21% 20% 17%

30% 37%52% 52%

59% 58% 61% 66%

CY00 CY05 CY10 CY11 CY13 CY14 CY15 CY16

Patent Proprietory off‐patent Off‐patent

De‐risking factors: Has a talent pool of 5,700+ employeesfrom 36 countries Raw materials sourced from 1,950+vendors across the globe



UPL’s management is keen to focus on R&D and supply factors in order to redistribute its seeds portfolio across its markets. Its aim is to increase the contribution of seeds to 15‐17% of its total income over the next 5 years from 10% currently. UPL is also likely to engineer seeds that give higher yield when used with its own products across crop‐protection to specialty‐nutrient – to follow suit with its global peers. This will increase the chance of its customers purchasing products from its own brands in all categories – thereby increasing customer stickiness to its brand.

Strong global footprint UPL has expanded its reach across the globe, targeting ideal markets by evaluating the demand for its products. Among Indian peers, UPL is the only company who has established a strong sales and direct marketing (S&M) base for all its major export markets, from where it derives about 82% or Rs 148bn of its revenues. For formulations, (which is a direct sales business) branding/front‐end is the key to success. UPL has been able achieve this because of its consistent investments in its geographies, which its peers are now emulating. UPL’s global footprint

Source: Company UPL’s major market – Latin America – has contributed 32% to its overall sales in FY18, followed by North America and India (with 18% contribution each) and then Europe at 14% of sales. UPL leads peers in terms of marketshare in fast‐growing markets of Latin America (largely Brazil, Argentina, and Chile) and APAC countries (Vietnam, China, and a few South‐East Asian countries). It also has created manufacturing capacities in close proximity to these markets with local RM procurement for cost efficiencies. Through Advanta, its fully‐owned subsidiary, UPL sells seeds and seed treatment services across Latam, Australia, US, India and Thailand.

North AmericaSales – 31

Marketing – 5

Latin America ex BrazilSales – 57

Marketing – 6

BrazilSales – 124

Marketing – 43

EuropeSales – 46

Marketing – 12

Africa & MESales – 20

Marketing – 3

IndiaSales – 480

Marketing – 72

Asia & ANZSales – 50

Marketing – 18

RiceCoSales – 15

Marketing – 2

DeccoSales – 23

18%#

32%#

18%#

13%#

ROW ‐ 18%#

LEGEND:

Addressed markets

# Contribution to Sales



From a local player to a global one… Industrial age of 1969‐79 Modern age of 1980‐99 Information age of 2000‐2018

Product portfolio ‐ Phosphorus based industrial chemicals ‐ Diversification into agrochemicals and specialty chemicals ‐ Post patent agrochemical product portfolio

‐ Patented, proprietary, post‐patent ‐ Seeds to pre and post‐harvest ‐ Products across herbicides, fungicides, insecticides and bio‐pesticides

Strategy ‐ Import substitution ‐ Global manufacturing ‐ Cost competitiveness ‐ Achieving market share ‐ Exports

‐ Focus on innovative formulations ‐ Creating brands ‐ Customer engagement ‐ Market expansion through own registrations

Presence ‐ Presence only in the domestic markets ‐ Export to 60+ countries ‐ Exports to 130+ countries ‐ Direct presence in 80+ countries

Revenues ‐ ~US$ 4mn in FY80 ‐ ~US$ 200mn in FY00 ‐ 39% international revenues

‐ ~US$ 2.75bn revenues in FY18 ‐ ~82% international revenues

Source: Company, PhillipCapital India Research Leader in agro chemical exports; 10x larger than the next player

Source: Company, PhillipCapital India Research

Manufacturing might across the globe… Recognising its potential in global markets, UPL has been allocating capital over the years to build sizeable manufacturing facilities across geographies, to leverage on supply efficiencies and formulation dynamics (such as local RM procurement leading to better cost efficiencies and cross‐currency efficiencies). Manufacturing facilities across the globe

Regions Active Ingredient Technical Grade Formulations North America

US Europe

UK France Netherlands

LATAM Argentina Chile Brazil

APAC Vietnam China

India Jammu Haldia Gujarat


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UPL PI Industries Rallis Excel crop care Meghmani Organics

It has active‐ingredient processingcapabilities in about 13 facilities,technical grade manufacturingcapabilities in about 19 facilities, andformulations in about 20 locations It chose its manufacturing outfits insuch a way as to manage the mostefficient method of sourcing routes fromeither local vendors or from its facilitiesin India and efficient distribution of itsproducts.



With fully integrated end‐to‐end capabilities, UPL has manufacturing facilities across 33 locations globally. In overseas markets, it has 19 facilities in Europe (in UK, France, Spain, Netherlands), Latin America (Argentina, Brazil, Chile), and Asia Pacific (Vietnam and China). It has 14 facilities in India in Gujarat, Jammu, and Haldia. It has strong raw material sourcing routes in place (90% local, and 10% imports from China for its domestic operations) from various vendors and has strong purchase power due to its scale.

Glufosinate as a replacement for Glyphosate will drive sales in the US North America is a major herbicides and fungicides market. While US is the largest territory in North America both in size and GDP, UPL has managed to penetrate only the boundary regions of the US, which the management calls the “horse‐shoe region”. In the US, the Midwest is the largest producer for corn and soybeans and it is one of the major exporter regions of that country. This region has been monopolised by Monsanto’s Glyphosate (widely used herbicide globally) – this single product constituted 10‐11% of the US herbicide market until 2016. However, it has been accused of being carcinogenic by the US authorities. Bayer’s AI ‐ Glufosinate, which went off‐patent, has the same efficacy and application as Glyphosate. We believe that the overhanging claim on Glyphosate could act as a huge replacement opportunity for Glufosinate. The management expects UPL to capture about 10‐25% of the replacement opportunity in the coming years. Expected revenue off‐take from Glufosinate

Source: PhillipCapital India Research estimates, Bayer US outlook Outlook on UPL’s global herbicide business: With increasing resistance in weeds affecting multiple crop varieties across the globe, the rate of innovation among agrochemical players, along with high‐efficacy product variety, will be the key to sustaining market‐share growth in the herbicides business. For UPL’s overseas business, the key drivers will be – opening up of the Midwest US for herbicides and Southern Europe for fungicides, and renewed organic growth in Western Europe for both segments. We believe UPL would be the largest beneficiary of demand revival in the Indian agrochemical space, and will continue to capture market‐share through its global reach and scale, based on: its USP of being an off‐patent leader and early adopter of proprietary off‐patent products in the market, its strong knowledge base, and its process‐design R&D capability.

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Expected offtake from replacement of Glyphosate

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Glyphosate share of US Herbicides

UPL’s growth will be driven by Brazil, US and European markets – herbicides and fungicides are the fastest‐growing segments among crop‐protection products

All the units are certified under ISO 9001for quality assurance, 14001 forEnvironment Pollution Control normsand OHSAS 18001 for health and safety

UPL has the second largest productioncapacity for Glufosinate, which couldeventually become a game changer forits North American business



Maturing inorganic investments aided strong operational efficiencies Inorganic play has been a part of UPL’s DNA since it decided to grow overseas while expanding its domestic footprint. UPL has been highly acquisitive in agrochemicals (25 acquisitions until FY17), starting with the acquisition of MTM Agrochemical UK in 1994, which provided an entry into European markets, and added herbicides into its product portfolio. UPL has made about 11 acquisitions for gaining access to global markets, and about 10 for expanding its product portfolio and technology access. M&A history Year M&A target Gained through acquisitions… 1994 MTM Agrochemical, UK Organophosphate products IP and entry into Europe 1996 Devrinol, US Entry into US, Japan and ROW. Patents on herbicides 2005 Cequisa, Spain Distributor and registrant for CPP* in Spain

SWAL, India Agro input products and value added solutions, plus distributor Reposo, Argentina Formulator and distributor in Argentina

2006 Cerexagri, France Fungicide products and manufacturing 2006 Advanta Ltd Access to seeds portfolio 2007 Evofarm, Colombia Distributor and marketing company in Colombia

ICONA, Argentina Formulator and distributor in Argentina 2008 Evofarms Group Distributor and marketing company 2010 RiceCo, US Herbicides manufacturer in US & Propanil portfolio 2010 Manzate Fungicide business Manufacturing, formulation facilities 2011 DVA Agro Brazi Formulation, marketing and selling CPP products 2011 SIB, Brazil Access to Brazil markets 2012 SDAgrichem Netherlands Tangible and intangible assets, IPR, product registrations, brands,

the distribution network and manufacturing facilities 2013 Neo‐Fog SA

JPB Coutage, France 2014 Optima Farm Solutions, India Agro farm solutions company in India


UPL has made more than 25 acquisitions across the globe. It has a direct presence in ~80+ countries and about 20 manufacturing units overseas



Outlook and valuations Owing to strong global operations and a formidable manufacturing setup, UPL should continue to capture global market share in agrochemicals, competing against big players such as Bayer‐Monsanto, BASF, Chemical National Corporation of China (Syngenta), and Dow‐Dupont. Over the past five years (FY13‐18), its revenue CAGR was about 16%, largely led by Latin American markets (including Mexico). In the same period, it also delivered strongly in its domestic markets (~13% ‐ 5 Year CAGR vs. industry CAGR of <10%). However, UPL saw a slowdown in growth in FY18, majorly due to Latin American and domestic markets because of various factors including: 1. Unfavourable weather conditions delaying planting patterns in LATAM, severe

drought situations in Mexico and Australia in Q1 and Q2, and dry/hot weather in Southern Europe affecting the fungicides business

2. High market inventories in the APAC and LATAM markets becoming a barrier for raising prices, and

3. GST and demonetisation‐related issues as a one‐off factor choking inventory movement in the Indian markets.

UPL: Geography‐wise revenues, growth, and contribution UPL gained marketshare vs. global leaders

Source: PhillipCapital India Research Estimates, Company data We expect UPL to deliver above‐industry growth, in the domestic markets (based on domestic industrial triggers such as government policy revisions and higher spends from farmers) as well as export markets. Key expectations: 1) North America: Entry into the Midwest (US) and additional upsides from the

Glyphosate fiasco adding to huge replacement opportunities for Glufosinate. We estimate revenue CAGR of 16%.

2) Latin America: Organic growth of 16% along with a reversal of stock movement in Brazil and Argentina, alleviating pricing pressures in the region.

3) Europe: Demand trends for new fungicide product launches for vineyards in West and Southern Europe should add to growth. From FY15 to FY16, Europe was a significant laggard for UPL; this situation reversed in FY17 and FY18 (12% and 13% growth, respectively) because of new product introductions in fungicides favouring crop patterns of Southern Europe. We estimate revenue CAGR of 14%.

4) ROW: The management expects strong growth from Thailand, Vietnam, and Indonesia (seed business to be a key), while Australia to be a laggard in FY19 (due to dry conditions extending to the summer season). We estimate a CAGR of 15%.

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Others

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2014

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UPL4%

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Strong hedging policy to protect cross‐currency fluctuations: EU and India: Natural hedges as procurement and sales are in localcurrencies. US: Transactions in USD. Taken forward covers for hedging. Revenues fullyhedged. Northern Brazil: Contributes to 50% of Latin American revenue. Natural hedgeas procurement and sales are in USD. Southern Brazil: Procurement in USD and sales in Brazilian currency (REAL). Takenforward covers for hedging.

Regionwise CAGR for FY10‐17: India: CAGR of 16% Latin America: CAGR of 22% North America: CAGR of 13% Europe: CAGR of 5% Rest of the World: CAGR of 10%



UPL beats industry growth in all its markets

Source: PhillipCapital India Research, Company Over the years, UPL has been consistently improving its gross profitability through investments on: (1) localised captive units for active ingredients, as a part of full backward integration, and (2) captive for intermediates, reducing its dependencies on external pricing factors. It improved its gross margins from 49% in FY12‐13 to 53% in FY18, with a high probability of sustaining these levels. With the added advantage of an improvement in gross profitability, UPL gained more headroom for expanding into newer territories, while continuing to build more on‐ground presence. It has maintained its EBIDTA margins at 17‐18% throughout the last 10 years. Strong gross profitability on robust backward integration More spending headroom for on‐ground presence overseas

Source: PhillipCapital India Research Strong cash‐flow generation with improvement in return ratios: UPL currently has a total debt of Rs 57.1bn (FY18) of which about Rs 33.1bn is through low‐coupon SGX‐listed bond funded for working capital requirements. With strong revenue outlook, improvement in margin, higher asset turnover, higher gross margins, and steady brownfield investments, we expect its business to generate an FCF of Rs 40.1bn over the next three years, which should help the company to reduce its long‐term debt (term loans). Return ratios (ROE and ROCE) should improve based on: (1) improvement in margins, (2) normalised brownfield investments, (3) improved debt structure (leading to lower interest rates), and (4) strong free‐cash generation leading to reduction in debt. We expect RoCE at 20%/21%/24% for FY19/20/23.

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22%

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North America LATAM Europe India ROW

Industry CAGR (FY12‐17) UPL CAGR (FY12‐17)

1,151

1,688

2,140

2,434

2,750

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49.0%

51.7% 52.1%

53.2%

42%

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FY10 FY13 FY16 FY17 FY18E

US$ m

n

Revenues Gross margins %

18% 18%17%

18%17%

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1% 1%

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EBITDA margins %Technical, Sales & R&D cost %Ad, Sales promotion %



ROCE movement and EBIT

Source: PhillipCapital India Research UPL has a strong working‐capital‐management mechanism, with debtor defaults at less than 1%. It is a product company with front‐end sales – a differentiating factor vs. the industry – therefore, it manages its working capital cycle at 10‐12% of sales. Valuations – huge potential for upside Historically, UPL has traded at a discount to agrochemicals peers (average), largely because of its comparatively higher leveraged balance sheet and capital intensiveness. However, the company has created a strong, self‐sufficient and expanding export base, which its peers lack. Direct channel relationships are necessary for formulations business and branding of products across geographies. Unbranded formulation sales means the pricing power is with the buyer (clients of Indian technical grade manufacturers, i.e., formulators and local brands) and not the seller – which leads to realisation risks. While UPL has sufficient capital to sustain its domestic market share, it would need to spend incremental capital to continue expanding its footprints through M&A and greenfield investments in order to tap into evolving global demand requirements. UPL: 5‐year PAT CAGR, FY20 trading PER UPL: 5‐year revenue CAGR, FY20 trading EV/sales

Source: PhillipCapital India Research Estimates, Bloomberg However, for the next three years, we believe that it has sufficiently capitalized itself to grow by 15% CAGR (revenues) in FY19‐21. It is currently trading at an FY20 P/E of 14.6x and 1.7x EV/sales vs. its peer average of 16x PE and 2.2x EV/sales (Rallis, PI Industries, Dhanuka Agritech, Meghmani Organics). We believe that the valuation gap between UPL and its Indian agrochemical peers will narrow based on its global reach

15%

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20%21%

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FY10 FY13 FY16 FY17 FY18E FY19E FY20E

ROCE EBIT m%

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PAT CA

GR

P/E

UPL PII

EXCC

Rallis

Dhanuka

0%

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0 1 2 3 4 5

Rev CA

GR

EV/Sales

UPL PII

Rallis

EXCC

Dhanuka



and exports, operational strengths, expected FCF generation, strong return ratios, and strong brand and distribution. We assign an 18x target P/E multiple to UPL’s FY20 EPS to arrive at a per share value of Rs 950. Our valuation is at a small premium to the industry’s average P/E of 16x and at around 33% discount to the Indian subsidiaries of global innovators (patent leaders’ average P/E is 27x FY20). Risk to our free‐cash‐flow expectation for the next three years: Extraordinary greenfield expansions or M&A opportunities could result in raising our revenue estimates while cutting our cash‐flow estimates. From its near‐term peak of Rs 895 in August 2017, the stock has fallen about 15% due to non‐operational factors, which makes it attractive among agrochemicals peers, especially in the light of its higher potential of outperforming.



Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 160,540 174,817 199,278 230,904Growth, % 16 9 14 16Other income 2,580 2,277 2,457 2,681Total income 163,120 177,095 201,735 233,585Raw material expenses ‐78,160 ‐82,910 ‐94,816 ‐109,785Employee expenses ‐16,270 ‐17,860 ‐20,174 ‐23,359Other Operating expenses ‐38,840 ‐46,191 ‐50,000 ‐57,434EBITDA (Core) 29,850 30,134 36,746 43,008Growth, % 24.6 1.0 21.9 17.0Margin, % 18.6 17.2 18.4 18.6Depreciation ‐6,720 ‐6,549 ‐7,246 ‐7,944EBIT 23,130 23,586 29,500 35,064Growth, % 34.6 2.0 25.1 18.9Margin, % 14.4 13.5 14.8 15.2Interest paid ‐7,350 ‐6,766 ‐6,677 ‐6,376Other Non‐Operating Income 4,440 3,147 4,045 4,723Non‐recurring Items ‐810 0 0 0Pre‐tax profit 19,410 19,967 26,867 33,410Tax provided ‐1,890 ‐3,630 ‐5,373 ‐6,682Profit after tax 17,520 16,337 21,494 26,728Others (Minorities, Associates) ‐190 0 0 0Net Profit 17,330 16,337 21,494 26,728Growth, % 67.8 (9.9) 31.6 24.4Net Profit (adjusted) 18,140 16,337 21,494 26,728Unadj. shares (m) 505 510 510 510Wtd avg shares (m) 505 510 510 510 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 28,950 33,640 33,239 37,522Debtors 56,560 58,223 66,324 76,795Inventory 41,560 43,667 49,743 57,596Loans & advances 14,920 17,709 20,174 23,359Other current assets 2,310 2,479 2,824 3,270Total current assets 144,300 155,719 172,304 198,542Investments 3,780 7,280 10,780 14,280Gross fixed assets 65,500 70,456 77,989 85,099Less: Depreciation ‐24,390 ‐27,394 ‐30,673 ‐34,227Add: Capital WIP 7,920 4,750 4,750 4,750Net fixed assets 49,030 47,811 52,065 55,622Total assets 203,810 217,511 241,849 275,144 Current liabilities 68,090 71,155 80,931 93,275Provisions 2,450 2,939 3,300 3,812Total current liabilities 70,540 74,094 84,231 97,086Non‐current liabilities 58,970 57,069 54,077 52,088Total liabilities 129,510 131,164 138,308 149,174Paid‐up capital 1,830 1,840 1,840 1,840Reserves & surplus 72,140 84,177 101,371 123,799Shareholders’ equity 74,300 86,347 103,541 125,969Total equity & liabilities 203,810 217,511 241,849 275,144 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 20,220 19,967 26,867 33,410Depreciation 6,720 6,549 7,246 7,944Chg in working capital ‐21,880 ‐580 ‐5,962 ‐7,953Total tax paid ‐3,000 ‐3,630 ‐5,373 ‐6,682Cash flow from operating activities 2,060 22,306 22,778 26,719Capital expenditure ‐12,050 ‐5,330 ‐11,500 ‐11,500Chg in investments ‐430 ‐3,500 ‐3,500 ‐3,500Cash flow from investing activities ‐12,480 ‐8,830 ‐15,000 ‐15,000Free cash flow ‐10,420 13,476 7,778 11,719Equity raised/(repaid) 970 10 0 0Debt raised/(repaid) 30,840 ‐4,496 ‐3,879 ‐3,136Dividend (incl. tax) ‐4,258 ‐4,300 ‐4,300 ‐4,300Cash flow from financing activities 27,480 ‐8,786 ‐8,179 ‐7,436Net chg in cash 17,060 4,690 ‐401 4,283 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 35.9 32.0 42.1 52.4Growth, % 42.9 (10.8) 31.6 24.4Book NAV/share (INR) 147.1 169.3 203.0 247.0FDEPS (INR) 35.9 32.0 42.1 52.4CEPS (INR) 50.8 44.9 56.4 68.0CFPS (INR) 29.3 35.6 34.8 41.2DPS (INR) 7.0 7.0 7.0 7.0Return ratios Return on assets (%) 12.9 10.4 11.7 12.3Return on equity (%) 27.1 20.3 22.6 23.3Return on capital employed (%) 21.4 15.5 17.5 18.6Turnover ratios Asset turnover (x) 1.7 1.7 1.9 1.9Sales/Total assets (x) 0.9 0.8 0.9 0.9Sales/Net FA (x) 3.5 3.6 4.0 4.3Working capital/Sales (x) 0.3 0.3 0.3 0.3Working capital days 107 106 106 107Liquidity ratios Current ratio (x) 2.1 2.2 2.1 2.1Quick ratio (x) 1.5 1.6 1.5 1.5Interest cover (x) 3.1 3.5 4.4 5.5Dividend cover (x) 5.1 4.6 6.0 7.5Total debt/Equity (%) 81.5 66.1 52.4 41.3Net debt/Equity (%) 42.6 27.2 20.2 11.5Valuation PER (x) 21.3 23.8 18.1 14.6Price/Book (x) 5.2 4.5 3.8 3.1EV/Net sales (x) 2.6 2.4 2.1 1.8EV/EBITDA (x) 14.0 13.7 11.2 9.4EV/EBIT (x) 18.0 17.5 13.9 11.5



Coromandel International (CRIN IN) End‐to‐end crop solutions play INDIA | Agro inputs | Initiating Coverage

17 April 2018

• Transitioned from a fertiliser company to an end‐to‐end crop‐solutions provider. • Diversified from subsidy‐burdened segments. • Largest private phosphatic fertiliser manufacturer in India, one of the top‐6 Indian crop

protection solutions providers. • Consistently invested in organic and inorganic setups to improve its product portfolio,

for raw material backward integration, and brownfield capacity expansions. • Will benefit from the transformation in domestic agro‐input consumption dynamics

aided by the government’s policy revisions to support balanced nutrient consumption (more NPKS than urea).

• Should see better growth and cost efficiencies on: (1) new product introductions in fertilisers favouring higher adoption rates, which will aide expansion into newer regions in domestic markets, (2) higher mix of non‐subsidy segments in revenue, and (3) strong improvement in cash flows by FY20 with the new DBT structure in place.

Unique products to lead growth, aid in expansion into newer regions CRIN has built a dedicated R&D facility with a pure focus on churning out new products that have high efficacy rates per MT. It expects to boost the current contribution of ‘Unique Products’ (a brand) to 50% of sales in the next 2‐3 years from 36% of sales currently. It is poised to achieve above‐peer average growth through: (1) demand reversal (rise) in NPK and (2) strong realisations per MT due to increasing revenue mix of Unique Products. With a combined product portfolio of end‐to‐end crop solutions and nutrients, CRIN expects to keep expanding its domestic marketshare by entering newer regions in the domestic markets, while building customer stickiness for its branded products. End‐to‐end product play – will lead to better return ratios CRIN approaches the market with a variety of products in fertilisers, crop protection chemicals, and specialty nutrients. It has a retail business for direct sales and promotion of its products and strong brand recall. While fertiliser segment is working‐capital intensive, CRIN’s increasing mix of high margin, non subsidy segments will offer higher ROCEs. With 800+ retail outlets as a forefront, CRIN has been adding new product categories to its kitty. Since the last decade, it has transformed into one among top 6 crop solutions player with consistent improvement in its return ratios. DBT to reduce subsidy burden by FY20, aid to strong cash flows Across the fertiliser industry, subsidy burden leads to working capital being locked in for 100‐110 days. However, with CRIN’s diversified portfolio and higher mix (vs. peers) of revenues and margins from its non‐subsidy business, it has a lower leverage burden of about 90days, which increases its profitability ratios. With the GoI’s initiative to implement DBT in fertilisers, we expect subsidy burden to reduce gradually over FY19‐20 to touch 60 days and a cash flow generation of Rs 7.7bn in FY20‐21. We see ROCE improving to about 30% by FY20 from 23% in FY18. We estimate gross FCF generation of Rs 18.7bn in FY19‐21E (despite capex of about Rs 6.1bn) because of the DBT impact and improvement in profitability (on strong growth and right revenue mix). Outlook and valuation With sustainable fertiliser growth due to policy‐related macro‐economic benefits and because CRIN is a complete crop‐solutions play that is leveraging the potential from evolving agronomics in the country, we believe that its outlook is more secure than other Indian fertiliser companies. With balanced growth, profitability, and capital reduction, with a higher mix of non‐subsidy business in agro inputs, we see a profit CAGR of about 25% in FY19‐21 and EBITDA margins improving to about 12.5% by FY20 from 10% in FY17. With triggers in place, we believe that CRIN deserves a value that is close to its end‐to‐end crop solution peers. Hence, we assign a multiple of 17x FY20 EPS and initiate with a BUY rating and target of Rs 640.

BUY (Maintain) CMP RS 534 TARGET RS 640 (+20%) COMPANY DATA O/S SHARES (MN) : 292MARKET CAP (RSBN) : 156MARKET CAP (USDBN) : 2.452 ‐ WK HI/LO (RS) : 588 / 328LIQUIDITY 3M (USDMN) : 1.7PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 61.8 61.8 61.9FII / NRI : 5.9 5.6 5.3FI / MF : 9.2 8.3 8.0NON PRO : 13.1 13.6 14.0PUBLIC & OTHERS : 10.0 10.7 10.8 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 1.7 ‐4.8 57.9REL TO BSE ‐1.7 ‐3.4 41.5 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20ENet Sales 112,512 127,132 142,173EBIDTA 12,495 15,423 18,023Net Profit 6,903 8,978 10,881EPS, Rs 24 31 37PER, x 23 17 14EV/EBIDTA, x 14 11 9P/BV, x 5 4 3ROE, % 22 24 24Debt/Equity (%) 55 37 23

Source: PhillipCapital India Research Est. Varun Vijayan (+ 9122 6246 4117) [email protected]

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Coromandel Fert BSE Sensex


COROMANDEL INTERNATIONAL LTD INITIATING COVERAGE

End‐to‐end play: Building value over the long run Coromandel International Ltd (CRIN), a Secunderabad‐headquartered company, is India’s largest private sector phosphatic fertiliser manufacturer and is now one of the top‐6 crop‐protection players in the country. About 40% of its sales in crop protection come from exports, largely to Latin American and African markets. CRIN (erstwhile Coromandel Fertilisers) started as a non‐urea fertiliser manufacturer in India. However, it transitioned into non‐subsidy segments such as specialty nutrients, crop protection, and seed tech. It is currently owned by the Murugappa group (US$ 4.5bn in EV) and EID Parry (India), which together hold about 62% of the company. CRIN: Sales and marketing reach across the country

Source: PhillipCapital India Research CRIN operates in two major product types: (1) nutrients (subsidy segment) and (2) crop‐protection and other allied businesses (non‐subsidy segment), offering agriculture solutions across the farmer’s value chain. Its nutrient segment remains its core business, garnering about 78% of its annual sales. The company markets nutrient products under the brand ‘Gromor’ and has 15 distinct variant with various combinations of NPKS (nitrogen, phosphorus, potassium, and sulphur), which provide better yields. CRIN: Business segments – FY18 revenue and share

Source: Company

CRINRev ‐ INR 113bn

SSP4%

Subsidy segment (78%)

Spec. Nutrients,Gypsum

8%

Phosphaticnutrients

66%

Traded goodsUrea & MoP

8%

Crop protection chemicals

14%

Non‐subsidy segment (22%)



CRIN has a strong marketing and distribution reach in the southern states of India with 60‐70% market share in its domicile states of Andhra Pradesh (AP) and Telangana (TS), 20‐25% share in Orissa (OR), 15‐16% share in Maharashtra (MH, where it has 30‐35% share in Vidharbha and hardly any presence in western MH), and ~15% in Karnataka (KA). It also has six divisional offices – one each in Andhra Pradesh, West Bengal, Madhya Pradesh, Maharashtra, Karnataka, and Uttar Pradesh – to target supply across all possible regions in the country. In line with its strategy of providing complete offerings and garnering customer goodwill, CRIN offers products that go beyond its brand – such as trading urea, muriate of potash (fully imported), and a few other complex fertilisers. Leader in phosphatic fertilisers With a total gross installed capacity of about 3.4mn MT in three major locations in the country, in FY18, CRIN will earn about Rs 74.4bn of sales (~66% of total revenues) from phosphatic fertilisers ex‐SSP (Single Super Phosphate), inclusive of subsidy income. Phosphatic fertiliser revenues and mix Volumes vs. subsidy

Source: PhillipCapital India Research, Indian Fertilisers, Dept of Fertilisers, GoI SSP revenues and average realisations per bag Volumes vs. subsidy

Source: PhillipCapital India Research, Dept of Fertilisers, GoI With the acquisition of Liberty Phosphates in 2012, CRIN acquired 0.8‐1 mn MT installed capacity for SSP production. We expect SSP to contribute Rs 4.2bn (4%) to CRIN’s total sales in FY18.

65 6879

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Total installed capacity of phosphatic fertilisers in India is about 15.5mn MT, of which CRIN contributes around 22%.

CRIN’s total pan‐India FY18 installed capacity for SSP = 1mn MT. India’s total installed capacity of SSP = 10.2mn MT



CRIN’s fertiliser types

Source: PhillipCapital India Research, Company Decade‐long transformation into integrated play favouring superior margins Over the last decade, CRIN has made tremendous investments for a strategic shift towards non‐subsidy businesses, and has taken up assets to provide crop protection, special nutrients, and other crop inputs. Non‐subsidy revenues and its contribution to EBITDA


Phosphatic Fertilisers

Generic Patented

Unique Shared Tech• GROMOR 14‐35‐14• GROMOR 28‐28‐0• GROMOR 20‐20‐0‐13• GROMOR 10‐26‐26• GROMOR 12‐32‐16

• GROMOR Max• GROMOR Paramfos 16‐20‐0‐13• GROMOR Ultra DAP• GROMOR Ultra 24‐24‐0‐8• GROMOR Parry Super (Fortified with Boron)

• GROMOR Parry Super• GROMOR Double Horse Super• GROMOR Godavari DAP (18‐46‐0)• GROMOR Godavari Urea• GROMOR MOP• GROMOR 17‐17‐17

Shared‐tech products: CRIN procures these and

groups them with combination products to increase the number of crops applicable or

efficacy of the product

CRIN also deals with generic products that are widely available in the markets as products of other brands. The combination and nutrient proportion is standard, only quality is

controlled by CRIN

Custom‐prepared targeted products that have a unique component of advantage in release or efficacy of a nutrient and patented under CRIN.

E.g.:GROMOR Max (28‐28‐0‐8) is one of CRIN’smost successful product; it has been modified to gradually release sulphur into soil, which enhances the soil potency and improves

absorption of sulphur by the crops

7.0

14.9

23.025.2

23%

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CRIN: Crop protection biz revenues CRIN: Movement of gross margins, EBITDA and ROCE

Source: PhillipCapital India Research Currently, CRIN derives about 22% of its annual revenues (around Rs 25bn, more than trebled in the last decade) and 38% of its EBITDA from its non‐subsidy initiatives, up from 11% and 23% in FY09. Its crop protection business (14% of sales) offers market diversification opportunities; under this, it supplies to about 81 international regions with close to 800 global registrations, also making it one among the top‐6 crop protection chemicals players in the country. The crop‐protection business generally favours high gross margins of 48‐50% across the industry, and with its strong operational efficiencies, CRIN derives average EBITDA margins (estimated) of 18‐20% from this segment. With its end‐to‐end crop solutions, CRIN has been able to boost its overall gross/EBITDA margins to 30%/12% in FY18 from 15%/7% in FY09.

Incremental focus on export markets for crop protection business Over the last decade, through the acquisition of Sabero Organics, CRIN entered agrochemicals exports – with major supply to Africa and Latin America. Currently, CRIN’s crop‐protection exports (about Rs 6bn in FY17) are largely ‘technical‐grade supply’ to its formulation partners, where its customers control the pricing economics. Global alliances for controlled procurement and supply

Source: Company CRIN is pursuing opportunities to enter into the formulations business and build a front‐end channel infrastructure – this would add value to its brand across geographies, inordinately boosting revenue and higher margin potential in these regions.

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Acquires pesticides

business of BPM

Acquisition of FICOM and

setting up Jammu Unit I

Expansion into Latin America

Acquires PasuraBiotech – Jammu

Unit II

SaberoAcquisition

Acquires EID Parry’s Bio tech

division

1994 2006 2009 2010 2011 2017

0% 1% 2% 2% 7% 14%

Contribution to Sales



Has a robust manufacturing set up. Brownfield expansion continues CRIN has an extensive manufacturing base across the country, which is near its raw‐material supply ports, and serves its target markets. In phosphatic fertilisers (ex SSP), it has created a total capacity of 3.4mn MT across Vizag, Kakinada, and Ennore, with about 30% self‐sufficiency in raw materials. The major raw material for phosphatic fertilisers is phosphoric acid, with a total requirement of 0.8‐0.85 MTPA in FY18, which is both imported (70%) and manufactured at Vizag (0.2mn MTPA) and Ennore (0.05mn MTPA). It expects to add phosphoric acid captive manufacturing capacity by 0.1mn MTPA by FY20. Being India’s largest SSP company, it has dedicated SSP plants across Ranipet, Pali in Maharashtra, Hospet in Karnataka, Gujarat, Madhya Pradesh, Rajasthan (2), and UP – with a total installed capacity of 1mn MTPA. Through the acquisition of Sabero Organics, CRIN gained patents and registrations in crop‐protection and specialty‐nutrient products; it has about seven manufacturing units across 2 locations in Gujarat, with a total capacity of 50,000+ MTPA. Its recent merger proposal of EID Parry’s India arm (in agrochemicals) shall lead to CRIN acquiring capabilities in bio‐pesticides (which is a fast‐growing segment in India) and an in‐house manufacturing unit at Cuddalore. Global alliances for controlled procurement and supply

Source: Company CRIN is currently the largest recognised organic‐manure (city compost: 10‐15% nutrient composition) player in India with a total supply capacity of 0.15mn MT, mainly operating in Andhra Pradesh and Telangana. Growing demand from organic farming is the key potential target for this business.

Captive phosphoric acid production provides a ~US$ 100 per MT cost advantage for phosphatic fertiliser production, adding directly to the business’ margins

Major raw materials for phosphoric acid production are rock phosphate (RP) and sulphuric acid. Procurement of these raw materials is largely through strategic initiatives/ investments in FOSKOR (South Africa) and TIFERT (Tunisia). CRIN sources RP and high‐grade phosphoric acid from OCP Morocco It sources additional phosphoric acid locally – from GCT and GSFC



Retail approach improving brand recall; ‘Mana Gromor Centres’ profitable In order to leverage its reach and brand recall, CRIN forayed into the rural retail segment in FY08 (Rs 13‐14bn revenues in FY17), starting retail outlets in regions where it has strong presence. Currently, it has about 800 centres across Andhra Pradesh, Telangana, and Karnataka that are well accepted by its customers. About 70% of its outlets are profitable and self‐sustaining while the rest (added during FY16‐18) are yet to break even. CRIN intends to expand its retail sales approach into Maharashtra (already started a centre in West Maharashtra; currently testing the response) and other target markets. In addition to product sales, CRIN focuses on its CSR and awareness campaigns through these retail outlets. It has implemented: (1) soil‐test campaigns, (2) quality awareness campaigns in SSP through 750 quick test kits, and (3) open campaigns where the company’s associated 60+ agronomists working with channel partners choose a portion of a farm to demonstrate CRIN’s products and quality. Strong reach across India; the only large player to have a retail front in the country S&M reach UPL ‐ India PII CRIN Rallis India EXCCDirect partners 4,000+ NA NA NA NAField Officers 1,000+ NA 2,200+ 1,200+ NARetail Stores NA NA 800+ NA NADistributor/dealers NA 10,000+ NA 1,500+ 40,000+Retailer connect NA 40,000+ 9,000+ 40,000+ 10,000+Farmer connect 1mn+ 2mn+ 2.8mn NA 1mn+

Source: Company, PhillipCapital India research Through its Mana Gromor Retail Centres, in partnership with the Andhra Pradesh government (50:50 capital investment), CRIN has initiated the opening of 34 (currently 5) Custom Hiring Service Centres (CHSC) for establishing farm‐machinery banks for providing complete mechanisation services. CHSC offers rental farm equipment to farmers who cannot afford to purchase high‐end agricultural machinery and equipment, playing a pivotal role in introducing high‐technology agricultural machinery to small farmers. Its objective is to boost crop production, improve quality, timeliness, and efficiency of agriculture operations.



Higher adoption rate in NPI – yielding better margin Since 2010, cost inflation and other agronomic factors seriously diminished the ability (in terms of affordability) of farm producers to adopt new fertiliser variants; these were priced higher than highly consumed products such as urea and SSP. CRIN faced declining consumption rates of NPKS fertilisers. Therefore, it took a strategic decision to put a dedicated R&D centre in Hyderabad that would develop newer, high‐efficacy, and low‐cost versions of NPKS (and also crop protection chemicals) in addition to its existing product line. Over the past few years, the new products (named Unique Products, these include fertilisers, specialty‐nutrients, and crop‐protection products patented by CRIN) have yielded strong growth in realisations, despite sluggish industry growth in fertilisers. This has helped improve CRIN’s gross margins. We see Unique Products contributing ~36% of CRIN’s Rs 89bn fertiliser sales in FY18

Source: Company CRIN has been churning out many Unique Products over the years. These usually have a higher efficacy rate and help farm producers in two ways – they reduce the consumption of other alternates, and give high‐yield per kg. As a result, the realisations per MT for CRIN have increased. Fertiliser division: According to the management, the adoption rate of the Unique Products has grown significantly. The current adoption rate (which is the mix of Unique Products in total sales) is about 36%, which it expects to improve to 50% in the next 5‐6 years. Since per‐MT realisation of these products is higher than its other products, the gross margins of the fertiliser segment have improved. In addition, CRIN has launched water‐soluble products that focus on ‘more crop per drop’, which is being widely adopted by horticulture and cash crop farms and clustered farms. These types of setups use delivery of nutrient through foliar application or the ‘fertigation’ delivery system (with drips). Here, the quantity of nutrients used would be less since the direct delivery increases the absorption rate by at least 2‐3x, even as it yields hefty realisations. Currently, CRIN is the largest Indian water‐soluble‐nutrient provider. Crop protection division: CRIN manufactures new off‐patented crop protection products from its established R&D base in Hyderabad. Here, the management has a mandate of launching two new products every year – monitored regularly since 2016.

28 31 2632

61

30% 32% 33%36%

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70


Rs bn

Unique products as a % to fertilizer sales



Soil nutrient balance to remain a priority for GoI As explained in the industry section, our analysis shows a large usage skew towards urea vs. other NPK fertilisers due to the higher subsidy levels, both input and output (price and distribution control). Since the early 70s, fertilisers were under the control of the government with import and sales regulations set by the authorities. Even today, largely because of lack of awareness, farmers continue to choose urea as a preferred nutrient treatment for their soil (urea is sold at very low MRPs vs other fertilisers). This has created a large divergence in the primary NPK (nitrogen (N), phosphorus (P) and potassium (K)) application ratio from an ideal 4:2:1 to the worst levels of 40:17:1 currently. NPK ratio in the top consuming states: Long‐term impact of subsidy non‐parity

Source: PhillipCapital India Research, Department of Fertilisers With years of adverse policy revisions, subsidies have become a true challenge for GoI and the states. These have a higher effect on yields across the country. Future outlook and evolution of subsidy delivery system We believe that a stronger and direct evolution of subsidy delivery system is required to implement a major change in the balance of nutrient consumption by the farming community. The new Direct Benefit Transfer (DBT) policy for fertiliser subsidies is an indication of GoI considering a stronger impetus to balanced consumption and distribution of fertiliser products. Under this policy, the release of subsidies is linked to consumption (linking purchase data through POS systems) rather than despatch of products (that tend to influence black markets and lead to diversion of use of products and other pilferages). This leads us to forecast a larger probability of delinking subsidies from MRP and direct subsidy fund transfers to farm producers’ accounts on a per hectare utilised area basis.

40 34 21 7.8 73.6 3 4

17 13 83.2 3

2.4 22

1 1 1 1 1 1 1 1

PJ HR UP All‐India avg AP‐TS KA MH Ideal ratio

Nitrogen Phosphorus Potassium Key fert consuming market

Urea tends to acidify the soil more than other nitrogen fertilizers. This is because it produces ammonia in higher concentrations. This gradually robs the fertility of the soil.



Current DBT scheme info‐graphics

Source: PhillipCapital India Research Advantages of direct transfer of subsidies to the farm producers, delinking subsidies with the maximum retail price:

Will bring down the working capital burden of companies Will promote more consumption of NPK fertilisers through awareness creation at

the retailers’ end by the GoI. Price parity, coupled with increasing earning of farm producers would help them spend the subsidies on a more balanced mix of soil‐nutrient products. The narrowing of the differential pricing in fertiliser products would enable farmers to decide the mix of products to be bought per hectare. This should create huge business potential for NPK fertiliser companies, as farmers can directly choose fertilisers (as there is parity in prices) and also enable GoI to achieve its target of reducing urea imports into the country.

Comparison of various forward stages of DBT

Source: PhillipCapital India Research Estimates, Department of Fertilisers, Ministry of Agriculture

Department of Fertilizers

Fertilizer companies

Retailers Data Capture Consumers

The consumption data is captured at the POS and is

submitted to Dept of Fertilizers

Subsidy claims are verified against the

consumption data and are settled in 7 days of

consumption

~95% of fertilizer retailers are equipped with POS machines

290

990 1,016950

1,430 1,430

300425 425

Current MRP MRP ‐ DBT direct to Farmer A/c MRP ‐ Delinking NUP benefits

Rs/Bag

Urea Phosphatic fert SSP



Outlook and valuations Being the leader in the NPK fertiliser business, CRIN has successfully leveraged on new opportunities to become an end‐to‐end agro‐inputs solutions provider (from being a fertiliser company). Because of its reach and sales edge over its fertiliser peers, CRIN is poised to continue to capture domestic market share in NPK fertilisers, competing against companies such as Chambal, Zuari Agro and also public‐sector juggernauts such as National Fertiliser Corp and RCF. In addition to CRIN’s strong play in fertilisers, through its decade‐long investments and strong strategic focus, it has built a formidable non‐subsidy business in crop protection, specialty nutrients, and other crop inputs. Richer product mix by FY21 Expected product revenue CAGR for FY17‐21

Source: PhillipCapital India Research The company is poised to increase its market‐share and expand into newer territories, tapping into the share of its peers, based on: (1) pan‐India manufacturing presence, over six direct distribution branches, 800+ retail outlets, and 9,000+ retailers serving its 2.8mn farmer consumers, (2) a wide portfolio of crop inputs across the country, and (3) shifting government policy dynamics. In addition, its strategic initiatives to expand globally through crop protection and specialty nutrient segments should add more value to its above‐industry‐average revenue growth. Gross margin vs. mix of product portfolio Holding margins despite higher SGA

Source: PhillipCapital India Research Its fertiliser business contributes about 78% of its overall annual revenues and this business had a CAGR of 7% in the last decade (above the industry’s CAGR of ~5%)

Phos Fert, 67%

Traded Fert, 7%

SSP, 4%

Crop protection,

15%

Others*, 8%2020‐21

12%

7%

10%

14%

8%

Phos Fert Traded Fert SSP Crop protection

Others*

FY17‐21E CAGR

84 81 83 82 78 78

19 17 18 22 22

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Subsidy segment Non subsidy segmentGross margins

9% 8% 8% 7% 10%

11%

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12%

13%

16%

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16%

17%

19% 19% 19% 19% 19%

14%

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FY13

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FY16

FY17

FY18E

FY19E

FY20E

FY21E

EBITDA margins SGA expenses



largely led by inorganic initiatives in newer non‐subsidy segments (which saw 42% CAGR in the same period). CRIN has an overall market‐share of 17‐18% in NPK, which makes it the largest private sector player in the country. Its FY17 revenues declined due to a sharp fall in subsidies of its phosphatic fertiliser business, while they were partially supported by strong growth in its non‐subsidy businesses. Over the last decade, CRIN has been improving its gross‐level profitability – to 30% in FY18 from about 24% in FY10 – through: (1) increased high‐margin product mix, (2) reducing raw material costs, and (3) captive units for raw materials as a part of backward integration. However, higher investments on R&D and on on‐field employees, and increasing product‐handling costs from domestic expansion and exports have kept EBITDA‐level margins at an average of 9‐10% from FY09 to FY17. Maturing businesses and investments in non‐subsidy and retail segments have created a non‐linear operational cost structure, which will lead to better EBITDA margins through FY18‐21 and further. We believe the margins will improve to 13% by FY21 because of better revenue mix coupled with cost efficiencies. Better cash flows: On DBT implementation and zero long‐term debt The new DBT policy links fertiliser subsidies to electronically captured consumption data at retailers’ POS terminals. Currently, CRIN is burdened with high levels of subsidy receivables (peaking at 99% of overall subsidy income and 90 days of sales). Because of this, working capital has increased to gross levels of Rs 35.2bn. We expect the effect of DBT to come through in 2019, translating into cash‐flow benefits from FY19. We estimate the subsidy burden to fall to around 60 days of sales (vs. current 90 days) and working capital improving to 105 days from 115 days in FY18, which should result in a Rs 13bn fall in subsidy receivables. We expect ROCE levels to improve due to strong free‐cash‐flow generation – to about 32% in FY21 from 18% in FY17. ROCE movement and EBIT

Source: PhillipCapital India Research CRIN should be able to leverage the effects of changes in fertiliser macroeconomics, leading to major reduction in its short‐term debt needs. Since FY17, CRIN is a zero long‐term debt company. Since FY17, its capex was about Rs 1.4bn on brown‐field expansions. With incremental cash flow from operations and continued nominal brownfield expansions, we estimate FCF of Rs 18.7bn in the next three years and a total ST debt reduction of Rs 10.5bn, bringing the net debt position to Rs 9.3bn by FY20.

27%

22%

17%20%

15%18%

23%

27%29%

31%

11% 11%

8% 7% 6%9%

11% 12% 12% 13%

0%

5%

10%

15%

20%

25%

30%

35%

FY08 FY10 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E

ROCE EBIT m%Heavy investment cycle burdened by reduced subsidies and pricing pressures



Valuations Being a leading private player in non‐urea, NPK fertilisers, with strong growth prospects and higher margins, CRIN has always traded at a premium to its fertilisers. It currently trades at 14.3x FY20 earnings, a 35% premium to its fertiliser domestic peers such as Zuari Agro, Chambal Fert, RCF, GSFC, and Deepak Nitrite, and in line with integrated domestic peers. We believe that its outlook is more secure than its fertiliser peers – balancing growth, profitability, and capital reduction, with a higher mix of non‐subsidy business in agro inputs. Our positive view on CRIN’s fertiliser business is because of: (1) the sustainable outlook of fertilisers in India, because of policy‐related macro‐economic benefits, and (2) the fact that it is an end‐to‐end crop solutions player, leveraging the potential from evolving agronomics in the country. In addition, CRIN’s non‐subsidy business exports have shown promise in the past two years, expanding into high‐growth markets of Brazil, Argentina, and a few African countries. We estimate a profit CAGR of about 25% in FY19‐21 and EBITDA margin of about 12.5% by FY20, largely driven by non‐subsidy business growing at a CAGR of 15% during the period (contributing to 23% of sales by the end of FY20). Five‐year PAT CAGR and FY20 trading PER Five‐year revenue CAGR and FY20 trading EV/sales

Source: PhillipCapital India Research Estimates, Bloomberg We believe the industry is set to get higher valuations in the backdrop of the benefits that arise from changing agronomics in domestic markets, policy revisions supporting expansion of fertiliser business to domestic geographies, and strong cash flow due to expected subsidy de‐burdening. We assign a multiple of 17x to CRIN’s FY20 EPS, closer to end‐to‐end crop‐solutions peers such as UPL, and initiate with a BUY recommendation and a target of Rs 640, an upside of 20% from current levels.

CRINChambal

Zuari Agro

GSFC

Deepak Nitrite

0%

10%

20%

30%

40%

50%

60%

70%

4.0 9.0 14.0 19.0

PAT CA

GR

P/E

CRINChambal

Zuari Agro

GSFC

Deepak Nitrite

‐10%

0%

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40%

50%

0.7 0.8 0.9 1 1.1 1.2

Rev CA

GR

EV/Sales



Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 99,766 112,512 127,132 142,173Growth, % ‐13 13 13.0 11.8Other income 541 573 623 692Total income 100,308 113,085 127,755 142,865Raw material expenses ‐71,210 ‐78,953 ‐88,064 ‐97,812Employee expenses ‐3,108 ‐3,544 ‐3,827 ‐4,171Other Operating expenses ‐16,163 ‐18,094 ‐20,441 ‐22,858EBITDA (Core) 9,827 12,495 15,423 18,023Growth, % 28 27 23 17Margin, % 10 11 12 13Depreciation ‐1,007 ‐990 ‐1,057 ‐1,153EBIT 8,820 11,505 14,365 16,871Growth, % 33 30 25 17Margin, % 9 10 11 12Interest paid ‐2,238 ‐1,704 ‐1,363 ‐1,083Other Non‐Operating Income 548 658 601 699Pre‐tax profit 7,123 10,459 13,603 16,487Tax provided ‐2,353 ‐3,556 ‐4,625 ‐5,606Profit after tax 4,770 6,903 8,978 10,881Net Profit 4,770 6,903 8,978 10,881Growth, % 43 45 30 21Net Profit (adjusted) 4,770 6,903 8,978 10,881Unadj. shares (m) 292 292 292 292Wtd avg shares (m) 292 292 292 292 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 1,678 2,381 1,545 2,436Debtors 16,217 17,393 19,825 22,172Inventory 17,246 18,570 21,259 23,774Loans & advances 33,930 35,947 36,520 34,263Total current assets 69,071 74,292 79,148 82,645Investments 3,885 4,085 4,285 4,485Gross fixed assets 23,868 24,368 26,898 28,918Less: Depreciation ‐10,596 ‐11,556 ‐12,576 ‐13,687Add: Capital WIP 219 219 189 169Net fixed assets 13,491 13,031 14,511 15,401Non‐current assets 3 3 3 3Total assets 86,450 91,411 97,947 102,534 Current liabilities 55,595 55,000 54,248 49,991Provisions 453 511 577 645Total current liabilities 56,048 55,511 54,825 50,637Non‐current liabilities 1,495 1,495 1,495 1,495Total liabilities 57,542 57,005 56,319 52,132Paid‐up capital 292 292 292 292Reserves & surplus 28,616 34,114 41,336 50,110Shareholders’ equity 28,908 34,406 41,628 50,402Total equity & liabilities 86,450 91,411 97,947 102,534 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 7,130 10,459 13,603 16,487Depreciation 1,007 990 1,057 1,153Chg in working capital 296 ‐1,556 ‐2,879 ‐3,293Total tax paid ‐2,538 ‐3,556 ‐4,625 ‐5,606Cash flow from operating activities 5,895 6,337 7,157 8,741Capital expenditure ‐890 ‐529 ‐2,537 ‐2,042Chg in investments 887 ‐200 ‐200 ‐200Cash flow from investing activities ‐10 ‐729 ‐2,737 ‐2,242Free cash flow 5,885 5,607 4,420 6,499Equity raised/(repaid) 0 1 0 0Debt raised/(repaid) ‐3,983 ‐3,500 ‐3,500 ‐3,500Dividend (incl. tax) ‐1,402 ‐1,405 ‐1,756 ‐2,107Cash flow from financing activities ‐6,185 ‐4,904 ‐5,256 ‐5,607Net chg in cash ‐299 703 ‐837 891 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 16 24 31 37Growth, % 43 44 30 21Book NAV/share (INR) 99 118 142 172FDEPS (INR) 16 24 31 37CEPS (INR) 20 27 34 41CFPS (INR) 18 19 22 28DPS (INR) 4 4 5 6Return ratios Return on assets (%) 8 10 11 12Return on equity (%) 17 22 24 24Return on capital employed (%) 18 23 27 30Turnover ratios Asset turnover (x) 2 2.3 2.5 2.6Sales/Total assets (x) 1 1.3 1.3 1.4Sales/Net FA (x) 7 8.5 9.2 9.5Working capital/Sales (x) 0.1 0.2 0.2 0.2Working capital days 43 55 67 78Liquidity ratios Current ratio (x) 1 1.4 1.5 1.7Quick ratio (x) 1 1.0 1.1 1.2Interest cover (x) 4 6.8 10.5 15.6Dividend cover (x) 4 5.9 6.1 6.2Total debt/Equity (%) 77 54.6 36.7 23.4Net debt/Equity (%) 71 47.7 33.0 18.5Valuation PER (x) 33 23 17 14Price/Book (x) 5.4 4.5 3.7 3.1Yield (%) 0.7 0.7 0.9 1.1EV/Net sales (x) 1.8 1.5 1.3 1.2EV/EBITDA (x) 18 14 11 9EV/EBIT (x) 20 15 12 10



PI Industries (PII IN) Leveraging on the niche CSM play… INDIA | Agro inputs | Initiating Coverage

17 April 2018

• Building on the niche business of Custom Synthesis & Manufacturing (CSM) in

agrochemicals; more than 63% of PII’s revenues come from processed technical‐grade exports to its global partners.

• Decades of experience, R&D strength, and a robust knowledge‐base; PII differentiates itself from its peers by being a preferred agrochemical product lifecycle partner for global innovators.

• Global demand seems to be reviving – based on its strong orderbook of about US$ 1.2bn in Q3FY18, increasing custom synthesis service queries, and high orderbook from its global clients (innovators). The domestic market is reviving on improving agronomics.

• We see solid growth for PII on: (1) added strong orderbook, (2) higher utilisations of added manufacturing capacities (3) strong R&D capabilities aiding to add more innovator products into its kitty, and (4) strong domestic S&M reach.

Largest CSM player in India and preferred partner for global innovators From being a polymer and industrial chemical manufacturer, PII transformed into a formidable agrochemicals CSM player, supplying synthesised technical‐grade chemicals to its global innovator partners. It addresses custom synthesis of a molecule – from discovery to the final grade chemical synthesis and large‐scale manufacturing (i.e., across its lifecycle). With a near monopoly in CSM in the agrochemicals space, it has garnered a strong orderbook of about US$ 1.2bn (7% CQGR over eight quarters) to be executed over the next 5‐7 years. From this, we estimate a revenue CAGR of 17% for CSM in FY19‐21.

First movers on patent and proprietary off‐patent products Unlike its peers in the agrochemicals industry, PII derives its revenues from patented and proprietary off‐patent products, selling under its own brand (rather than generic products). Through global partnerships with innovators, it is the first mover for these novel products (often newly patented) in domestic markets (where they are licensed to sell as branded products). With its strong S&M reach across the country, connecting directly to 40,000+ retail points and 10,000+ channel partners, it should see above‐industry growth; we expect 10% CAGR over the next three years despite competition from large players (UPL, Bayer).

Impending risk from domestic competition, entry into new verticals to mitigate Immediate challenges (such as rising cost of development of new products) and a shrinking global industry have put immense pressure on global innovators to outsource their product lifecycle to low‐cost regions for cost efficiencies. Domestic CSM competitors currently operating in other verticals could enter PII’s domain, despite the presence of players such as Anupam Rasayan in that space. Understanding this risk and with its existing capability in CSM, we believe that PII is bound to participate in adjacent verticals such as pharma, imaging, and electronic chemicals. This should reduce its vertical concentration and mitigate the risk to its growth path. We believe that with such a move, PII stands to gain immensely in terms of growth and margin improvement, as the CSM business has an average EBITDA margin profile close to 28%.

Outlook and valuation With its strength in the niche CSM segment, we believe that PII’s outlook for profitable growth in the next three years from its organic business remains intact. We estimate 15% CAGR led by CSM CAGR of about 17%. EBITDA margins should stay at around 24% throughout FY19‐21. At the CMP, the stock trades at 22x our FY20 EPS. We believe it well deserves its premium valuation because of its position in the value chain, but factoring in vertical concentration and competition risk in its current vertical (agrochemicals), we assign only a minor upgrade to the current valuation ‐ 24x FY20 EPS. With limited upside from current levels, we initiate coverage with a Neutral rating and a target of Rs 940. However, as PII’s entry into new verticals should lead to higher growth and value in CSM, we recommend adding this stock during price corrections of 5‐6%.

NEUTRAL (Add @ Lows) CMP RS 864 TARGET RS 940 (+9%) COMPANY DATA O/S SHARES (MN) : 138MARKET CAP (RSBN) : 119MARKET CAP (USDBN) : 1.852 ‐ WK HI/LO (RS) : 1035 / 674LIQUIDITY 3M (USDMN) : 1.81PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 51.4 51.6 51.6FII / NRI : 14.7 17.3 19.1FI / MF : 18.9 15.7 15.0NON PRO : 4.4 3.9 3.6PUBLIC & OTHERS : 10.4 11.6 10.8 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 4.8 ‐13.4 3.6REL TO BSE 1.4 ‐12.1 ‐12.9 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20ENet Sales 23,381 26,608 30,554EBIDTA 5,533 6,405 7,357Net Profit 3,884 4,643 5,411EPS, Rs 28.2 33.7 39.2PER, x 29.9 25.0 21.5EV/EBIDTA, x 20.6 17.6 15.1P/BV, x 5.9 4.9 4.2ROE, % 19.7 19.7 19.7Debt/Equity (%) 2.4 0.5 ‐


60

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Jan‐16 Jul‐16 Jan‐17 Jul‐17 Jan‐18PI Indus BSE Sensex


PI INDUSTRIES INITIATING COVERAGE

Formidable player in agrochemicals Since 1963, PII has built a formidable presence in terms of reach, R&D, and manufacturing capabilities in agrochemicals. In 1996, it collaborated with global leaders to invest on developing new chemical grades – thus entering custom synthesis of new molecules from the discovery phase to technical‐grade manufacturing. Its business model is different from its listed peers. It: 1. Addresses domestic markets with new products that are in‐licensed from global

innovators and manufactured and marketed under the PII brand. This is not done by any other Indian agrochemical company today. We estimate Rs 9.2bn of revenues in FY18 from this segment.

2. It participates in the niche area of custom synthesis and manufacturing (CSM), co‐innovating with global partners, which are R&D‐based innovation players, to commercialisation of its products. From this segment, it should earn a revenue (exports) of Rs 15.9bn in FY18.

Revenue mix of CSM to domestic in‐licensing business

Source: PhillipCapital India Research The company sources global partnerships for CSM majorly from Japan (40+ years relationship), Europe, and US and it has a pool of 100‐120 scientists and another 200 high‐level analysts and technical resources. Recently, it has signed an MoU with one of the global leaders in the agrochemical and industrial chemical space, BASF, to add 4‐5 newly discovered molecules into the CSM portfolio. Order‐book size and growth


6.39.7 11.5 12.7 14.4 15.9

5.9

7.0

8.89.2

9.4 9.0

60%54%

18%11% 13% 10%

11%

19% 26%

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0 850

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Q4 FY17

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Q2FY18

Q3 FY18

US$ m

n

Order book size



With strong process and internal checks in place and an internal policy of zero tolerance to errors, the company has created a strong order book of about US$ 1.2bn, 7% CQGR from US$ 395mn in Q4FY14. We expect this to be executed in 7‐10 years, depending on various factors such as annual capacity requirement of its global partners and global testing and registration processes. The two major factors that influence the conversion ratio of the order book into revenues are: (1) acceptance of the discovered molecule by PII ‐ evaluating the feasibility, margins, and efficiency ratios, and (2) failure in the process cycle of custom synthesis, leading to unsuccessful commercialisation of the product. Environment and pollution control expenses % to sales

Source: PhillipCapital India Research, Company

Leveraging on the niche CSM play Global agrochem innovators such as Syngenta and BASF have outsourced their synthesis processes to players in low‐cost geographies because of declining market share due to slowdown in innovation of new product introduction (NPI), rising cost of development, and rising time to market. India has become the preferred geography for outsourcing synthesis and manufacturing processes because of IP protection, leading R&D facilities, and low‐cost offerings. With its leading technological advancements and right R&D infrastructure, PII has become a preferred CSM partner for ‘co‐innovation’ for global companies. It has more than 24 such relationships, a few of them more than a decade long. It assists its partners – from the discovery phase of a new molecule to the final commercialisation and co‐marketing of products in desired geographies.

376

542 538 547440 478

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Environmental expenses as a % of sales PII has kept a strong focus on environment control systems, and spends 2‐3% of its sales on waste and effluent treatment. Through continued research in synthesis and manufacturing, it has reduced waste output better than industry standard levels.



Value chain in CSM

Source: Company PII has created a large portfolio of products, and new additions forming 30‐35% of its CSM revenues. Margin dynamics shrinks with the ageing of the product, but PII keeps adding new molecules into its kitty. This, along with cost efficiency improvement efforts have led to a stable and high‐margin profile. While each product’s margin profile tapers in a cycle of 4‐5 years, PII has been able to manage its profile through internal cost‐efficiency improvements. Strong revenue growth in CSM business

Source: Company, PhillipCapital India Research We understand (from various sources including the management) that for the ‘discovery‐to‐commercialisation’ of a new molecule or product it costs global innovators US$ 400‐500mn. Additionally, for R&D, it costs 7‐8% of their global sales. When these global innovators outsource to PII, they reduce the total investment cost by half (to US$ 250‐300mn) and they end up reducing the burden on their operating costs.

610 11 13 14 16

1822

25

52%58% 57% 58% 60%

63% 65% 66% 67%

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FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E

INR bn

CSM revenues % to sales

The company expects to commercialize at least 2‐3 new patented molecules every year



Geographical presence

Source: Company Cutting‐edge R&D and manufacturing capabilities Its multi‐functional facilities with global standards are the key to PII’s success in CSM. It has created capacities strong enough to supply to both CSM and domestic demand, with eight manufacturing facilities in Panoli and Jambusar in Gujarat – five plants spread over 47,000 sqmt in Panoli, and three in Jambusar with ample scope of expansion up to 90,000 sqmt. These facilities carry various technical accreditations for advanced multi‐product manufacturing. PII has a strong in‐house process development team to handle scale up, safety, and waste treatment aspects. At Udaipur, PII also houses a 125,000 sq. ft. advanced R&D lab with 150+ scientists, 50+ technical analysts, and an in‐house library with a vast array of knowledge resources.

All of PII’s manufacturing facilities are accredited by ISO 9001:2000, ISO 14001, ISO 17025, and OHSAS 18001 Its R&D facility at Udaipur is a NABL ISO 17025 accredited and GLP certified lab with centralized LIMS system for data and information management It has 5 formulation setups at Jambusar.

6,000 man‐days of training. 90%+ retention of high‐performing staff



Robust reach in domestic markets Unlike its peers in the agrochemical industry, PII derives its revenues from patented and proprietary off‐patent products acquired through in licensing, which it sells under its own brand (rather than generic products). Domestic presence and strengths

Source: Company Domestic revenues and CAGR

Source: PhillipCapital India Research, Company Through global partnerships with innovators, PII is the first‐mover in domestic markets in terms of these novel products (often newly patented) contributing to about 37% of its revenue. With strong domestic sales and marketing reach in 40,000+ retail points and with 10,000+ channel partners (five‐decade old market presence) it

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gradually captured market share from its small peers; currently its domestic market share is 5‐6%. PII addresses all major varieties of crops in India – from food‐grains to horticulture – in largely insecticides and fungicide products across the large producer markets of north and west India. PII also acts as a registration and marketing partner for a few alliances, such as with Mitsui Chemicals, providing a strong sales platform for Mitsui’s products.

Very little competition in CSM in domestic markets In outsourced synthesis, there are three major phases in the development of an agrochemical: (1) discovery, development, scale‐up, (2) evaluation trials, regulatory services, registrations, and (3) manufacturing, and marketing and distribution. Because of the cost advantages that it offers, India hosts a fleet of contract manufacturers with the capability to synthesise products from registrations to manufacturing and launch. However, PII is among the very few who has complete knowledge of handling custom synthesis – from discovery through trials and manufacturing to the final stage of marketing and distribution (of the final formulated product). CSM peers in the country

Companies Verticals

Revenue scale Agrochem Pharma Ind Chem Imaging IT Tech Polymer

PI Industries Large Divi's Labs Large Anupam Rasayan Medium Amoli Organics Medium TCI Chemicals Small Denisco Chemicals Small Nakoda Chemicals Medium

Source: PhillipCapital India Research A few private players such as Anupam Rasayan, who is also a large capacity holder in technical‐grade chemical supply for global leaders such as Syngenta (now China National Chemical Corp), is capable of assisting its clients in Phase 2 and Phase 3 of the product lifecycle. With some additional investments, right resources, and time, such players could pose a threat to PII’s monopoly in being a comprehensive CSM provider in agrochemicals. However, PII’s recent investments in expanding its CSM capabilities – from agrochemicals into newer verticals of imaging and electronics chemicals – could reduce the competition risk. With this move, PII can also increase its potential growth avenues, by leveraging its knowledgebase.

PII has superior CSM capabilities with its acquired knowledge base and well‐trained skill‐pool; it is also the largest agrochemical player in the Indian CSM space.

More than 60% of revenues from brands are ranked #1 (as per the management) in the domestic market



Outlook With a unique business model, PII has gained traction through its acquired knowledge pool and has heavily invested on R&D and custom synthesis infrastructure. Due to the cost benefits that India offers, its strategy has been to target leading innovators across the world to assist in their innovation process cycle while offering cost and time benefits. This makes its products more competitive in terms of price and quality in the markets that its global partners address. With its strong sales and marketing reach and through its in‐licensing business model, the company has achieved above‐industry‐average growth in domestic markets (10% CAGR) – with a mix of branded and marketed products for global innovators. Its global exports have shown promising 20% CAGR; Japan is the largest contributor (in FY18, total Asia sales contributed to about 31% of its overall revenues). North America contributed to about 24% of its overall revenues and Europe about 6%. Geography‐wise revenues, growth, and contribution

Source: PhillipCapital India Research Estimates, Company data We expect PII to continue delivering 14% CAGR through FY19‐21 in the domestic market based on domestic triggers – such as government policy revisions and higher spending from farmer communities. Exports should outperform because of its strong orderbook and demand revival in global markets. Key expectations: • North America (24% to sales): New introductions in herbicide and fungicide

products to generate better growth starting from FY19; full realisation of the potential should start coming in by FY20. We estimate this region to see a CAGR of 17% in FY19‐21.

• Europe (6% to sales): BASF (with four new molecules) and added orderbook from Europe should largely drive revenues in this region. We expect the overall revenues to see a CAGR of 25% in FY19‐21.

• Asia: Largest contributor to sales (31% of overall sales / 49% of exports). There are signs of a revival in the markets of APAC. We estimate a CAGR of 15% in FY19‐21 from this region.

• ROW: PII has been a late entrant into the fast‐growing Latin American and African markets assisting in marketing of its client’s products. We expect it to leverage demand for cost‐effective technical‐grade solutions from this region. We estimate CAGR of 25% over FY19‐21 from ROW.

Continued efforts to improve operational efficiencies With over five decades in chemicals business and a focus on implementation of global standards in internal control processes, PII monitors not only its production efficiency but also its consumption (such as materials, water, fuel).

97

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Mix of EBITDA margin improvement over a five‐year period

Source: PhillipCapital India research, Company We expect PII to protect its current margin levels (49% gross, 24% EBITDA) in FY19‐21. Due to continued pressure on innovators, average realisation of PII’s products has declined gradually. However, its efforts in process and operational efficiencies support stable margins. Nevertheless, a recent decline in PII’s volumes and a fall in new product cycles could dent its margin improvement efforts. CSM contributes to above peer average margins, despite high R&D spends

Source: PhillipCapital India Research Insignificant debt + nominal capex = Strong FCF With its strong management of cash flows, it has fully met its working capital requirements through internal accruals. It generated FCF of Rs 1.19bn in FY17 and expects Rs 2.2bn in FY18, which should help reduce its insignificant long‐term debt of Rs 0.5bn in FY18 (debt to equity of 0.02x) and generate free cash of about Rs 8.5bn over FY18‐21, with an expected CAPEX of Rs 5.75bn on brownfield expansions for the new product lines, supported by internal accruals leading to stable ROCEs.

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FY18E EB

ITDA

m%

15.7% ‐2.9%+5.0%

+2.0%+3.0%

+22.8%

53%49%

43% 43%39%

17%

23%

16%19%

13%

UPL PII Rallis India Dhanuka Agri EXCC

FY18



ROCE movement and EBIT


Valuations • Premium: Has always been valued at a premium to industry peers because of a

near monopoly in low‐cost Indian CSM, operational strengths and robust patent/ proprietary off‐patent products in domestic markets. Historically, it enjoyed a premium of 45‐50% to the industry (peer) average and deserves to be valued at these levels, supported by its leading EBITDA margins and ROCEs.

• Other positive factors that support valuation premium: Insignificant debt position and strong FCF generation.

• Target: With the above construct in mind and factoring in the possible risk of vertical concentration and competition from other CSM players entering the vertical (PII has a high concentration risk as agrochemicals is its only vertical) we assign a minor valuation upgrade to its FY20 PE to a multiple of 24x, arriving at a per share value of Rs 940 – in line with its historical valuation premium.

We initiate coverage on PII with a NEUTRAL rating and target of Rs 940, while recommending adding during price corrections of 5‐6% from current levels (due to a possible re‐valuation scenario on PII entering new verticals in CSM).

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ROCE EBIT m % In the investment cycle of the company, ROCEs to slowly recover. We expect these investments more towards diversification



Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 22,439 23,381 26,608 30,554Growth, % 8 4 14 15Other income 330 347 417 486Total income 22,768 23,728 27,024 31,041Raw material expenses ‐11,632 ‐11,941 ‐13,593 ‐15,613Employee expenses ‐2,226 ‐2,437 ‐2,702 ‐3,104Other Operating expenses ‐3,378 ‐3,817 ‐4,324 ‐4,967EBITDA (Core) 5,533 5,533 6,405 7,357Growth, % 28.3 0.0 15.8 14.9Margin, % 24.7 23.7 24.1 24.1Depreciation ‐730 ‐833 ‐929 ‐1,060EBIT 4,802 4,700 5,475 6,296Growth, % 27.4 (2.1) 16.5 15.0Margin, % 21.4 20.1 20.6 20.6Interest paid ‐72 ‐46 ‐20 ‐3Other Non‐Operating Income 366 524 735 922Pre‐tax profit 5,095 5,179 6,190 7,215Tax provided ‐501 ‐1,295 ‐1,548 ‐1,804Profit after tax 4,594 3,884 4,643 5,411Growth, % 47.5 (15.5) 19.5 16.6Net Profit (adjusted) 4,594 3,884 4,643 5,411Unadj. shares (m) 138 138 138 138Wtd avg shares (m) 138 138 138 138 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 1,326 2,748 3,947 4,857Debtors 4,237 4,551 5,183 5,953Inventory 4,319 4,356 5,183 5,953Loans & advances 1,697 1,780 2,027 2,328Other current assets 180 237 270 310Total current assets 11,760 13,671 16,610 19,402Investments 833 1,467 1,967 2,467Gross fixed assets 10,713 12,404 14,147 16,147Less: Depreciation ‐1,263 ‐2,096 ‐3,025 ‐4,086Add: Capital WIP 773 743 750 750Net fixed assets 10,223 11,051 11,872 12,812Total assets 24,015 27,378 31,638 35,870 Current liabilities 5,597 5,832 6,592 6,964Provisions 316 333 378 434Total current liabilities 5,913 6,165 6,970 7,398Non‐current liabilities 1,830 1,472 1,114 1,001Total liabilities 7,743 7,637 8,084 8,398Paid‐up capital 138 138 138 138Reserves & surplus 16,134 19,603 23,416 27,334Shareholders’ equity 16,272 19,741 23,554 27,471Total equity & liabilities 24,015 27,378 31,638 35,870 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 5,095 5,179 6,190 7,215Depreciation 730 833 929 1,060Chg in working capital ‐1,252 ‐237 ‐935 ‐1,454Total tax paid ‐1,052 ‐1,285 ‐1,548 ‐1,804Cash flow from operating activities 3,522 4,489 4,637 5,018Capital expenditure ‐1,499 ‐1,661 ‐1,750 ‐2,000Chg in investments ‐830 ‐634 ‐500 ‐500Cash flow from investing activities ‐2,330 ‐2,295 ‐2,250 ‐2,500Free cash flow 1,192 2,194 2,387 2,518Debt raised/(repaid) ‐395 ‐358 ‐358 ‐114Other financing activities ‐32 ‐415 ‐830 ‐1,494Cash flow from financing activities ‐427 ‐773 ‐1,188 ‐1,607Net chg in cash 766 1,421 1,199 910 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 33.4 28.2 33.7 39.2Growth, % 47.0 (15.7) 19.5 16.6Book NAV/share (INR) 118.3 143.2 170.8 199.2FDEPS (INR) 33.4 28.2 33.7 39.2CEPS (INR) 38.7 34.2 40.4 46.9CFPS (INR) 23.1 28.7 28.3 29.7Return ratios Return on assets (%) 21.3 15.3 15.8 16.0Return on equity (%) 28.2 19.7 19.7 19.7Return on capital employed (%) 28.9 19.7 20.0 20.1Turnover ratios Asset turnover (x) 1.6 1.5 1.6 1.6Sales/Total assets (x) 1.0 0.9 0.9 0.9Sales/Net FA (x) 2.3 2.2 2.3 2.5Working capital/Sales (x) 0.2 0.2 0.2 0.2Receivable days 68.9 71.0 71.1 71.1Inventory days 70.3 68.0 71.1 71.1Payable days 60.9 71.7 72.1 72.1Working capital days 78.7 79.5 83.3 90.6Liquidity ratios Current ratio (x) 2.1 2.3 2.5 2.8Quick ratio (x) 1.3 1.6 1.7 1.9Interest cover (x) 66.6 103.2 267.3 1,846.3Total debt/Equity (%) 5.1 2.4 0.5 ‐Net debt/Equity (%) (3.1) (11.5) (16.3) (17.7)Valuation PER (x) 25.2 29.9 25.0 21.5PEG (x) ‐ y‐o‐y growth 0.5 (1.9) 1.3 1.3Price/Book (x) 7.1 5.9 4.9 4.2EV/Net sales (x) 5.1 4.9 4.2 3.6EV/EBITDA (x) 20.9 20.6 17.6 15.1EV/EBIT (x) 24.0 24.3 20.5 17.7



Excel Crop Care (EXCC IN) From an average player to a serious competitor INDIA | Agro inputs | Initiating Coverage

17 April 2018

• Key addition in Sumitomo Chemicals’ strategic investments. Sumitomo is one of the

largest global specialty chemical producers and owns 65% in EXCC through which it has gained strong market reach in India.

• With Sumitomo, EXCC moves ahead in the value chain – from being a technology borrower to a technology owner in crop‐protection space. This move will combine EXCC’s brand recall, sales and marketing reach in domestic and African markets, and manufacturing capabilities with Sumitomo’s research strength – for new discoveries catering to the growing needs of the global farmers.

• Leveraging its parent’s strength, EXCC has quickly turned around – introducing high‐quality products in global markets, in turn improving overall realisations. 9MFY18 indicates sharp growth in revenues (about 30% YoY) despite normal capacity additions.

• With a global market revival likely in 2018‐19, EXCC should provide strong competition to its peers while continuing to improve its operational efficiencies.

Piggy‐backing on a global leader, NPIs to drive realisations With its acquisition by Sumitomo Chemicals (revenue: US$ 18.5bn), EXCC has gained a strong platform for growth and profitability. In addition to its own branded products, EXCC can launch Sumitomo’s unique products in India. While Sumitomo focuses largely on insecticides (for rice, wheat, barley, pulse crops), the combined entity will benefit from addition of new products in fungicides and herbicides segments (cross‐leveraging portfolios). This can also facilitate entry into larger markets – such as US, Europe. Additionally, launching Sumitomo’s high‐efficacy products in India should increase EXCC’s average realisations. India to form a strong manufacturing base for Sumitomo Global majors have started outsourcing their new product development lifecycle because of: (1) immediate challenges in innovation (such as cost of investments and expensive skill pool, (2) global slowdown in the agrochemicals industry, and (3) stringent environmental protection norms. India offers low‐cost infrastructure/operational advantages and inexpensive high‐quality skill‐sets. With this construct, we believe that Sumitomo could use EXCC for marketing and distribution, and assistance for custom synthesis and formulations at both lower costs and time‐to‐market. We expect EXCC’s bulk (technical grade) sales CAGR at 36% in FY18‐21. Branded sales business to be driven by Sumitomo products Sumitomo’s combined subsidiaries currently address 12‐13% of the Indian crop protection market (size: about US$ 2.6bn) with two brand umbrellas: EXCC’s Celphos, Celcron, etc., and Sumitomo’s Sumiso Agro, Sumika, etc. Before the acquisition in 2016, EXCC showed extraordinary growth in branded sales (25% CAGR, because of technical grade manufacturing and formulation capabilities) while its bulk sales saw 14% CAGR. With the new strategic processes and structure in place, we believe EXCC will gain access to Sumitomo’s products, leading to 26% CAGR in branded sales in FY18‐21. Outlook and valuation EXCC currently trades at 11.5x FY20 EV/EBITDA, slightly above its industry peers. From here, we expect it to earn better realisations without comprising its demand based on its shift from being a sourced technology player to patented platform of Sumitomo in terms of new product launches added with its strong marketing capability. In 9MFY18, its sales/EBITDA/PAT saw growth of 30%/52%/30% yoy, indicating the effect of cross‐leveraging the Sumitomo portfolio. With strong growth outlook and continued margin accretion, we assign a multiple of 14x to our FY20 EV/EBITDA, close to its premium peer PII, and at a 20% premium to its industry average to arrive at a target of Rs 4,000. We initiate coverage with a BUY rating.

BUY CMP RS 3299 TARGET RS 4000 (+21%) COMPANY DATA O/S SHARES (MN) : 11MARKET CAP (RSBN) : 36MARKET CAP (USDBN) : 0.652 ‐ WK HI/LO (RS) : 3940 / 1630LIQUIDITY 3M (USDMN) : 1.13PAR VALUE (RS) : 5 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 65.0 65.0 65.0FII / NRI : 0.7 0.2 0.2FI / MF : 7.8 9.5 9.5NON PRO : 2.9 1.9 1.9PUBLIC & OTHERS : 23.6 23.4 23.5 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 2.3 11.3 90.6REL TO BSE ‐1.1 12.6 74.2 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20ENet Sales 12,357 15,906 20,422EBIDTA 1,617 2,322 3,064Net Profit 995 1,421 1,911EPS, Rs 90.4 129.2 173.8PER, x 36.5 25.5 19.0EV/EBIDTA, x 22.4 15.5 11.5P/BV, x 6.6 5.3 4.1ROE, % 18.2 20.6 21.7


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Excel Crop BSE Sensex


EXCEL CROP CARE INITIATING COVERAGE

Business transformation Transformed from being a licensed player to an IP owner Before acquisition • Started off as a trading partner for global agrochemicals products • Transformed into a high‐quality technical‐grade manufacturer in agrochemicals,

with a strong R&D backbone for customisation of generic formulae. • Caters to pre‐harvest and post‐harvest farming, seed treatment, and plant‐

enhancement segments, and a few products for the fish industry. • Founded by industry veterans and technical experts – Mr Ashwin Shroff and Mr

Dipesh Shroff (promoters of Excel Industries Ltd) – in 1969, it was housed under the flagship chemicals business of Excel Industries Ltd, providing financial and technical support.

• Excel is the third company in the world to make endosulfan (an insecticide technical), the first in Asia to make butene‐diol (polymer technical), the second in the world to develop glyphosate (herbicide technical), and the third in the world to develop aluminium phosphide (fumigant).

Product mix until acquisition Domestic vs. exports (bulk and branded)

Source: Company EXCC was hived off from its parent (Excel Industries Ltd) and listed in 2003. Since then, it has actively promoted Integrated Pest Management (IPM) to Indian farmers. It has also demonstrated the use of Integrated Crop Management (ICM) techniques to farmers, using innovative methods. Forming multiple alliances for technology across the world, including Nufarm (who had ~14.7% stake in EXCC before acquisition by Sumitomo Chemicals), EXCC prepared technical‐grade processes to address various categories of pesticides and post‐harvest products. Pre‐acquisition: Unsteady revenues, EBITDA margin as low as 7% (peers at 15%+)


Insecticides, 39

Herbicides, 32

Metal Phos, 16

Fungicide, 6

Soil nutrients & Bio

pesticides, 7

2015‐16

Brand ‐Domestic, 59Brand ‐

Exports, 17

Bulk ‐Domestic, 14

Bulk ‐Exports, 10

2015‐16

6,486

7,447

6,950

7,791 9,856

10,252

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Net revenues EBITDA m%



Under‐utilisation of business assets led to unsteady revenues until FY16 EXCC has built a strong sales and marketing reach in the domestic markets – with a distribution network of 40,000+ dealers, a customer base of 2mn+, and strong brand presence (domestic brand business contributed to 59% of revenues in FY16). Despite these advantages, its revenue profile from FY10 to FY16 was unsteady and its margins dipped as low as 7% (EBITDA), largely due to strong competition from domestic peers and EXCC’s low NPIs (new product introductions) and registrations. Before Sumitomo acquired EXCC, the company focused on bringing global technology and quality in agrochemicals to its customers through alliances with global molecular R&D firms like Nufarm and Mitsui. Strong reach across India; but largely under‐utilised for years S&M reach UPL ‐ India PII CRIN Rallis India EXCC Direct partners 4,000+ NA NA NA NA Field Officers 1,000+ NA 2,200+ 1,200+ NA Retail Stores NA NA 800+ NA NA Distributor/dealers NA 10,000+ NA 1,500+ 40,000+ Retailer connect NA 40,000+ 9,000+ 40,000+ 10,000+ Farmer connect 1mn+ 2mn+ 2.8mn NA 1mn+

Source: Company, PhillipCapital India research ‘Sourced tech’ to ‘own tech’: Sumitomo to drive branded sales Post‐acquisition • Knowing the limits of their focus and finances, the Shroff family chose to sell

EXCC to a leading agrochemical player in the global markets. • In June 2016, Sumitomo Chemicals of Japan acquired around 25% from the then

promoters, 20% from significant minority shareholders, and made an open offer to consolidate their holding to a total of around 65%.

• With this acquisition, the combined Indian revenues for Sumitomo doubled to US$ 265mn and it gained a strong marketing reach in the country. The product portfolio of EXCC does not overlap Sumitomo’s, which provides a stronger outlook for the combined entity in the branded business.

Steady and exponential growth in overall revenues Branded sales to pick up

Source: Company, PhillipCapital India Research Estimates Sumitomo Chemicals is one of the largest post‐patent global agrochemicals provider with crop protection and health sciences accounting for US$ 2.9bn of revenues. It drives its business through innovative products and new combination of high‐efficacy products catering to the resistant class of pesticides. As it moves up the value chain – from being a sourced/licensed technology player to becoming an ‘own IP’ ‘unique product space’ player – EXCC’s realisations should improve. This would aid EBITDA margin accretion.

7,791

9,856

10,252

8,959

9,684

12,560

16,189 20,812 26,657

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6,420

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11,225 14,160 17,868

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In the initial 3‐4 years, we believe that EXCC would be in an investment mode, supported by the parent company; it will set up processes, add capacities, and R&D for the domestic manufacturing of Sumitomo products. For the next 2‐3 years we expect double‐digit growth from both its branded and bulk business segments. GM to be steady despite higher mix of traded goods Branded exports to grow faster

Source: Company, PhillipCapital India Research Estimates The major exports markets for EXCC are Africa, Europe, and Central America with strong traction expected in its branded sales. It also has presence in the US, largely for technical (bulk) sales to formulators. We expect branded exports CAGR of 31% over FY18‐21, because of the new Sumitomo tech products in EXCC’s kitty. Sumitomo has only about 2% market exposure in MEA and Central America for its combined businesses of pharma, health and crop sciences, petrochem & plastics, energy & functional, and IT‐related chemical solutions. It is more likely to use EXCC as a conduit for its MEA and Central American branded markets.

India to form a strong manufacturing base for Sumitomo Global majors have started outsourcing their new product development lifecycle because of: (1) immediate challenges in innovation (such as cost of investments and expensive skill pool, (2) global slowdown in the agrochemicals industry, and (3) stringent environmental protection norms. India offers low‐cost infrastructure/operational advantages and inexpensive high‐quality skill‐sets. Therefore, Sumitomo is likely to target manufacturing capacities and technology through EXCC. Expects an exponential growth in bulk sales Bulk exports to grow faster

Source: Company, PhillipCapital India Research Estimates

910

2,471 3,181

3,676

4,181

41%39% 39% 39% 39%

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2,654

2,952

2,739

2,068

2,646

3,530

4,681

6,262 8,262

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2824

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FY19E

FY20E

FY21E

INR mn

Total Bulk sales as a % of sales

1,480

1,600

1,210

1,460

1,752

2,102

2,523 3,027

1,472

1,139

858 1,186 1,778 2,579

3,739

5,234

0

1,000

2,000

3,000

4,000

5,000

6,000

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY21E

INR mn

Bulk ‐ Domestic Bulk ‐ Exports



Sumitomo could use EXCC for marketing and distribution and assistance for custom synthesis and formulations at both lower costs and time‐to‐market. Sumitomo’s India division (revenue at about US$ 125mn and EBITDA margins of about 11% in FY17) has been lagging in terms of market share and has bled in terms of EBITDA margins till FY12 for a marketshare capture as low as 5%. It broke even in FY12 after five years of operational losses, achieving sales growth at the expense of margins. With EXCC’s reach and capability, Sumitomo is likely to focus on Indian sales through EXCC, generating better sales realisation for its own products as well as EXCC’s branded products. CAPEX investments Debt repayment and FCF

Source: PhillipCapital India Research EXCC executed brownfield expansions (capex of ~Rs 1.3bn in FY14‐17) for both new and existing products. We expect it to execute a capex of ~Rs 2.2bn over FY18‐21 in both greenfield and brownfield projects in order to accommodate Sumitomo’s new technology and product varieties. EXCC’s manufacturing capabilities: EXCC has manufacturing capabilities across three major locations – Bhavnagar, Gajod, and Silvassa. All three facilities have state‐of‐the‐art machinery and are accredited with ISO 9002, ISO 14000, and OSHAS 18000, meeting statutory requirements on quality and safety. Each of the company's manufacturing locations have well‐equipped R&D facilities and explore new eco‐friendly chemistries for crop‐care, and effective formulation technologies and recipes. With the help of its internal processes and analytical systems, EXCC is now propagating a more scientific approach – to consistently improve operational efficiencies through bettering effluent treatment, low wastage from production, and right blends in processes. Its aim is to improve consumption without compromising quality. EXCC has mastered complex technologies and delivered the best solutions globally. Its technical actives, bulk, and branded formulations are presently registered and marketed in Asia Pacific, South Asia, West Asia, Africa, Europe (West and East including CIS countries) Central & South America, and the US.

211

354

347

375

667

625

325

825

FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E

Rs m

n

CAPEX investments

Immediaterequirement of

capacity addition on new products

346

678

164

‐352

332

‐515

‐164

102

253

31

99

‐84

132

709

656

‐600

‐400

‐200

0

200

400

600

800

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY21E

Debt Debt repayment FCF



Outlook Before FY17, i.e., before its acquisition by Sumitomo, EXCC faced agrochemicals heavyweights such as UPL, Bayer India, BASF India, and PII in the domestic and exports markets. With very low innovation in its product portfolio and the management’s limited focus on agrochemicals, its growth trajectory was unsteady, despite its market reach and brand recall. With innovation in the post‐patent space, EXCC faced huge challenges from its domestic and global peers in terms of better efficacy products, expansion of product categories, and pricing pressures. While its peers continued to invest in R&D‐led manufacturing capabilities and new product roll‐outs (self/collaboration), EXCC found its existence narrowing to its existing product mix and brownfield capacity expansions. Product registrations (current) significantly low for EXCC

Source: PhillipCapital India Research Estimates Sumitomo’s acquisition to turn around EXCC’s portfolio… Globally, Sumitomo Chemicals holds more than 10,000 patent registrations (as of FY17) in specialty chemicals and it is assumed to hold ~1,500+ registrations in agrochemicals. Annually, it files 500‐600 new product registrations across the board, with 80‐85 patents in agrochemicals. Piggybacking Sumitomo’s product variety, EXCC would become a significant competitor in the agrochemical space. We believe that the combination of Sumitomo and EXCC would lead to an exponential growth in EXCC’s revenues (both branded and bulk combined), building a strong competitive base in both domestic and export markets. We expect this union to open a plethora of opportunities for EXCC and provide financial support with a shift in its potential market size by giving it access to new patented products (from Sumitomo) and by sharing technology in the domestic manufacturing of these products. We expect EXCC to improve its EBITDA margin to 15% by FY20 on higher sales realisations. Being a no‐debt company, we expect better conversion of free cash flows in FY19‐21 of Rs 1.5bn. We expect FY18 and FY19 to see capex of Rs 1.8bn on brownfield and greenfield expansions.

31

4144

5055

FY13 FY14 FY15 FY16 FY17

Product reg ‐ EXCC

3,902

4,272

4,692

4,976 5,934

FY13 FY14 FY15 FY16 FY17

Product reg ‐ UPL



Valuations With Sumitomo taking over the control of the company, EXCC is at an inflection point – there could be exponential growth and strong profit ahead. Its transformation from an outsourced/collaborated technology agrochemicals company to an owned‐IP product company deserves a higher valuation, one that is closer to the Indian subsidiaries of global innovators (average 20x FY20 EV/EBITDA). We believe that Sumitomo, which was struggling in terms of market share and local manufacturing capabilities in India, will fully exploit EXCC’s capabilities in terms of reach, manufacturing capability, and process re‐orientation skills. As such, we estimate sales, EBITDA, and PAT CAGR of 30% in FY18‐20. We assign a multiple of 14x FY20 EV/EBITDA and initiate coverage on EXCC with a BUY rating and a target of Rs 4,000.



Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 9,486 12,357 15,906 20,422Growth, % 8 30 29 28Other income 198 203 284 390Total income 9,684 12,560 16,189 20,812Raw material expenses ‐5,727 ‐7,704 ‐9,846 ‐12,691Employee expenses ‐824 ‐948 ‐1,185 ‐1,481Other Operating expenses ‐2,167 ‐2,291 ‐2,836 ‐3,575EBITDA (Core) 966 1,617 2,322 3,064Growth, % 2.1 67.3 43.6 32.0 Margin, % 10.2 13.1 14.6 15.0 Depreciation ‐171 ‐182 ‐231 ‐263EBIT 795 1,434 2,092 2,802Growth, % 3.2 80.3 45.8 33.9 Margin, % 8.4 11.6 13.2 13.7 Interest paid ‐12 0 0 0Other Non‐Operating Income 46 29 30 51Non‐recurring Items 165 0 0 0Pre‐tax profit 996 1,463 2,122 2,853Tax provided ‐245 ‐468 ‐700 ‐941Profit after tax 751 995 1,421 1,911Growth, % 5.6 69.8 42.9 34.5 Net Profit (adjusted) 586 995 1,421 1,911 Unadj. shares (m) 11 11 11 11 Wtd avg shares (m) 11 11 11 11 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 215 131 263 972Debtors 2,166 2,581 3,327 4,276Inventory 2,397 3,097 3,992 5,132Loans & advances 557 754 971 1,249Other current assets 104 126 162 208Total current assets 5,438 6,688 8,715 11,837Gross fixed assets 3,221 3,549 4,175 4,774Less: Depreciation ‐1,345 ‐1,503 ‐1,710 ‐1,947Add: Capital WIP 110 425 400 100Net fixed assets 1,985 2,470 2,865 2,927Total assets 7,479 9,214 11,635 14,820 Current liabilities 2,575 3,083 3,974 5,109Provisions 145 377 486 624Total current liabilities 2,720 3,460 4,460 5,733Non‐current liabilities 280 280 280 280Total liabilities 3,000 3,740 4,740 6,013Paid‐up capital 55 55 55 55Reserves & surplus 4,424 5,418 6,840 8,751Shareholders’ equity 4,479 5,473 6,895 8,806Total equity & liabilities 7,479 9,214 11,635 14,820 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 831 1,463 2,122 2,853Depreciation 171 182 231 263Chg in working capital ‐361 ‐591 ‐895 ‐1,140Total tax paid ‐220 ‐471 ‐700 ‐941Cash flow from operating activities 421 584 757 1,034Capital expenditure ‐375 ‐667 ‐625 ‐325Chg in investments 52 0 0 0Cash flow from investing activities ‐322 ‐667 ‐625 ‐325Free cash flow 99 ‐84 132 709Dividend (incl. tax) ‐152 0 0 0Other financing activities 151 0 0 0Cash flow from financing activities ‐1 0 0 0Net chg in cash 98 ‐84 132 709 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 53.3 90.4 129.2 173.8Growth, % 5.6 69.8 42.9 34.5Book NAV/share (INR) 407.2 497.6 626.8 800.6FDEPS (INR) 53.3 90.4 129.2 173.8CEPS (INR) 53.8 107.0 150.2 197.6CFPS (INR) 63.8 50.4 66.1 89.4DPS (INR) 11.5 ‐ ‐ ‐Return ratios Return on assets (%) 10.8 11.9 13.6 14.5Return on equity (%) 13.1 18.2 20.6 21.7Return on capital employed (%) 16.3 18.0 20.6 22.0Turnover ratios Asset turnover (x) 2.1 2.3 2.4 2.6Sales/Total assets (x) 1.3 1.5 1.5 1.5Sales/Net FA (x) 5.0 5.5 6.0 7.1Working capital/Sales (x) 0.3 0.3 0.3 0.3Receivable days 83.3 76.2 76.3 76.4Inventory days 92.2 91.5 91.6 91.7Payable days 91.3 86.1 87.6 88.0Working capital days 101.9 102.6 102.8 102.9Liquidity ratios Current ratio (x) 2.1 2.2 2.2 2.3Quick ratio (x) 1.2 1.2 1.2 1.3Net debt/Equity (%) (4.8) (2.4) (3.8) (11.0)Valuation PER (x) 61.9 36.5 25.5 19.0PEG (x) ‐ y‐o‐y growth 11.1 0.5 0.6 0.6Price/Book (x) 8.1 6.6 5.3 4.1EV/Net sales (x) 3.8 2.9 2.3 1.7EV/EBITDA (x) 37.3 22.4 15.5 11.5EV/EBIT (x) 45.4 25.2 17.2 12.6



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

Management Vineet Bhatnagar (Managing Director) (91 22) 2483 1919 Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6246 4101 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735 Research Automobiles Engineering, Capital Goods Pharma & Specialty Chem Dhawal Doshi (9122) 6246 4128 Jonas Bhutta (9122) 6246 4119 Surya Patra (9122) 6246 4121 Nitesh Sharma, CFA (9122) 6246 4126 Vikram Rawat (9122) 6246 4120 Mehul Sheth (9122) 6246 4123 Agro Chemicals IT Services Raag Haria (9122) 6667 9943 Varun Vijayan (9122) 6246 4117 Vibhor Singhal (9122) 6246 4109 Strategy Banking, NBFCs Shyamal Dhruve (9122) 6246 4110 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Manish Agarwalla (9122) 6246 4125 Infrastructure Neeraj Chadawar (9122) 6246 4116 Pradeep Agrawal (9122) 6246 4113 Vibhor Singhal (9122) 6246 4109 Telecom Paresh Jain (9122) 6246 4114 Logistics, Transportation & Midcap Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Consumer & Retail Vikram Suryavanshi (9122) 6246 4111 Technicals Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Media Subodh Gupta, CMT (9122) 6246 4136 Preeyam Tolia (9122) 6246 4129 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Production Manager Vishal Gutka (9122) 6246 4118 Vishal Gutka (9122) 6246 4118 Ganesh Deorukhkar (9122) 6667 9966 Akshay Mokashe (9122) 6246 4130 Metals Editor Cement Dhawal Doshi (9122) 6246 4128 Roshan Sony 98199 72726 Vaibhav Agarwal (9122) 6246 4124 Vipul Agrawal (9122) 6246 4127 Sr. Manager – Equities Support Economics Mid-Caps Rosie Ferns (9122) 6667 9971 Anjali Verma (9122) 6246 4115 Deepak Agarwal (9122) 6246 4112 Sales & Distribution Asia Sales Corporate Communications Ashvin Patil (9122) 6246 4105 Dhawal Shah 8522 277 6747 Zarine Damania (9122) 6667 9976 Kishor Binwal (9122) 6246 4106 Sales Trader Bhavin Shah (9122) 6246 4102 Dilesh Doshi (9122) 6667 9747 Ashka Mehta Gulati (9122) 6246 4108 Suniil Pandit (9122) 6667 9745 Archan Vyas (9122) 6246 4107 Execution Mayur Shah (9122) 6667 9945

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 RafflesCityTower,

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JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZTower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, OceanTower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

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15th Floor, VorawatBuilding, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

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75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

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UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com UNITED STATES: Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of TradeBuilding

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

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www.ashaphillip.net/home.htm INDIA

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