B E A C O N A Newsletter by SIMCON– SIMSREE Consulting Club

Volume : 2

Issue : 7 May 2014

INDUSTRY ANALYSIS : AGRO CHEMICALS

Introduction

Indian agriculture has come a long way since the Green Revolu-

tion of the late 1960s. The food grain production in country in

the FY2014 is estimated to be 263 million metric tonnes. How-

ever, India’s agricultural yield of 2 metric tonnes/hectare is

lower than the global average. One of the key reasons for the

low yield is loss of crops due to pests – which in turn can be

attributed to the low consumption of pesticides – 0.58 Kg per

hectare compared to the global average of 3 Kg per hectare. The

Indian government estimates this loss to be around $8.5 billion

every year on an average. The low usage of pesticides are on

account of low purchasing power of farmers, lack of awareness

about crop protection benefits and poor accessibility of crop

protection chemicals.

INDUSTRY OVERVIEW

India is the fourth largest producer of agrochemicals globally,

after United States, Japan and China. The industry can be di-

vided into following segments:

1. Pesticides Segment

2. Seeds Segment

3. Fertilizers Segment

PORTER’s 5 FORCES ANALYSIS

Barriers to Entry

Because of the capital and

cash requirements of this

industry, it is very

unlikely that new entrants

would succeed. Due to the

large fixed costs of run-

ning fertilizer plants and

mining operations, vol-

ume is key to profitabil-

ity, so a small player is not likely to be successful. Additionally

the extensive data submission to regulatory authorities, compli-

ance with strict environment laws and other regulations serve as

entry barriers for new players. Entry into formulations is rela-

tively easier than techni-

cals with comparatively

low capital requirements.

Threat of Substitutes

With advances in science and rising concern about the harmful

effects of pesticides on the environment, the pesticide usage has

grown only marginally through the past decade. Integrated Pest

Management (IPM) is now seen as a way to achieve sustainable

agricultural production with lesser pesticides usage and conse-

quently lesser damage to the nature. The introduction of GM/

transgenic crops which are pest resistant and even drought resis-

tant have brought substantial decline in usage of chemicals. The

usage of fertilizers however has increased manifold as the GM

crops too demand certain nutrients not present in the soil. The

seeds segment has no substitutes and hence many agrochemical

industries have diversified into this segment and are investing

heavily in biotechnology and

R&D.

Bargaining Power of Suppli-

ers

The suppliers to the agro-

chemical industry are in gen-

eral rather weak, given that

the input for this industry mostly consists of raw materials i.e.

active ingredients. Many of the chemical substances derived

from these raw materials are input for further production, mak-

ing the chemical/agrochemical industry an important supplier to

itself. Also a low concentration of suppliers means a lower bar-

gaining power of suppliers. All in all, the bargaining power of

suppliers is low to medium.

Bargaining Power of Con-

sumers

Fertilizer purchasers are gen-

erally large trading firms

while buyers of seed and pes-

ticide would usually be dis-

tributers who would then sell

to the farmers. In each case there is a middleman between the

producer and end-user. This may limit some of the ways that

farmers themselves can influence pricing. However, consump-

tion gets affected by affordability which is key for volume

growth and dependent on the prospects of Agriculture in India.

Thus bargaining power of

consumers is low.

Intensity of Rivalry : Top ten

companies control almost

80% of the market share in

India. The market share of

large players depends primar-

ily on the product portfolio

Volume : 2

Issue : 7

BEACON : Page 1

May-2014

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and introduction of new molecules and strategic alliances

amongst competitors are common to reduce risk and serve a

wider customer base. The leading players drive some margin

growth with more innovative products. The intensity of rivalry

is thus medium-high.

IMPACT ANALYSIS

Existing Policies & Scenario

Urea Policy 2013

Under the new policy, the government will give 12-20 per cent

post-tax return on fresh capital infused by manufacturers for

setting up of new plants as well as for expansion and the re-

vamp of the existing ones. The government controls the urea

sector and has fixed the MRP at Rs 5,360 per tonne. The differ-

ence between the MRP and cost of production is given as sub-

sidy to manufacturers. For determining the cost of production of

new plants to be set up after the policy comes into effect, the

government has set a floor and ceiling price of urea based on

the price of natural gas plus 12-20 per cent equity returns.

Impending rise in Gas Price

The government, last year, approved a hefty rise in gas prices to

around $8.40 per million British thermal units in a bid to boost

returns for local producers, spur investment in the industry and

ease acute power shortages. Gas accounts for nearly 80 percent

of the production cost of urea. According to Fertiliser Associa-

tion of India, India consumes about 30 million tonnes a year of

urea, with local producers supplying 22 million tonnes and the

rest imported. The gas price hike is estimated to increase the

annual urea production cost by ₹100 billion. Thus, higher pro-

duction costs for the country's most widely used fertiliser would

force authorities to raise either farm or food subsidies. An alter-

native would be to allow manufacturers to pass on the costs

through higher prices.

Reduction of Subsidy to Manufacturers of Fertilizers In a bid to avoid a potential ratings downgrade, the Indian gov-

ernment will aim to cut its fiscal deficit to 4.1 percent of GDP

in FY15 by lowering fuel and fertiliser subsidies. The govern-

ment aims to reduce bills arising due to subsidy provided to

urea – the country’s most widely used fertilizer. The fertiliser

subsidy bill has tripled in the past seven years and the govern-

ment has allocated 679.7 billion rupees in 2014-15, but the fig-

ures stands well short of what's needed given the impact of the

impending gas price hike. The government fixes support prices

for the food grains considering input costs. If the urea price

goes up, then it has to raise the MSP (minimum support price)

of food grains. The rise in food grain prices will be reflected in

the government's food subsidy. Thus the government trapped in

a vicious circle.

The Impact

Fertiliser manufacturers are going slow on expansion plans fol-

lowing the petroleum ministry’s approval to double natural gas

prices. The grievances are the pricing of gas, lack of offtake

commitment and concerns over gas availability through long-

term tie-ups. Fresh investments in new projects have been

stalled due to uncertainty over subsidy for the revised gas price.

Inadequate subsidy budgets and delays in disbursal already

plague the industry which has led to increased working capital

requirements of companies. The manufacturers fund this sub-

sidy shortage through short-term debt straining the cash flow

from operations, impacting their credit profiles, as borrowing

costs are not included in the subsidy reimbursement mecha-

nism.

TREND ANALYSIS

Increasing Herbicide consumption : Tropical climatic condi-

tions and high production of paddy, cotton, sugarcane and other

cereals in India drive the consumption of insecticides. Avail-

ability of cheap labor for manual weed picking also contributed

to low consumption of herbicides in India. However herbicides,

now, are the fastest growing segment due to increasing farm

labour wages in India.

Strategic Alliances and Acquisitions : Increase in strategic

alliances among large players for greater market reach and ac-

quisitions of smaller companies globally to diversify product

portfolio. Rallis has a marketing alliance for key products with

FMC, Dupont, Syngenta, Bayer and Nihon Nohayaku. In addi-

tion, UPL has had a series of small acquisitions globally to enter

new geographies and gain product expertise.

CONCLUSION

The crop protection market has experienced strong growth in

the past and is expected to grow further at approximate 12% p.a.

to reach $ 6.8 billion by FY17. The growth would be largely

driven by export demand which is expected to grow at 15-16%

p.a, while domestic demand is expected to grow at 8-9% p.a.

Biopesticides, which currently represent only 4.2% of the over-

all pesticide market in India, are expected to exhibit an annual

growth rate of about 10% in the coming years. The seed seg-

ment is expected to grow at 3.8% CAGR till FY2018. However,

the fertilizer segment is expected to remain stagnant with no

addition in capacities until the new government comes out with

clear gas pricing and subsidy related policies.

SOURCES: AgroNews, IndianMirror, Nuziveedu Seeds,

Henry Fund Report, The Hindu Business Line, Business Today,

Business Standard, Phillip Capital Agri Inputs 2012, Phillip

Capital Agri Inputs Feb 2014

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Volume : 2

Issue : 7

BEACON : Page 2

May- 2014

INDUSTRY ANALYSIS : AGRO CHEMICALS

COMPANY ANALYSIS : UPL

Volume : 2

Issue : 7

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BEACON : Page 3

May - 2014

Introduction :

United Phosphorus Ltd was incorporated on January 2,

1985 with the name Vishwanath Commercials Ltd. In February

1985, the company went public. Later in February 1994 Shri

R.D. Shroff along with his family and investment companies

acquired 78.61% of the equity capital of the company and

changed the name to Search Chem Industries Ltd. In March

1995 the group reorganised the shareholding, as a result United

Phosphorus Limited acquired 75% of the Equity Capital of

Search Chem Industries Limited from the family and invest-

ment companies of Shri R. D. Shroff. The company is engaged

in the research, manufacture and distribution of crop protection-

products, speciality chemicals and other industrial chemicals

and seeds.UPL is one of the top-five companies in the world

under the generic agro chemical domain. Within India, the com-

pany is the largest producer of crop protection products.

Company has 23 manufacturing sites, which includes

nine in India, four in France and two in Spain. They operate in

every continent and have a customer base in 123 countries with

their own subsidiary offices in Argentina, Australia, Bangla-

desh, Brazil, China, Canada, Denmark, France, Germany, Hong

Kong, Indonesia, Japan, Korea, Mauritius, Mexico, New Zea-

land, Russia, Italy, Turkey, Spain, South Africa, Taiwan, USA,

UK, Vietnam, Zambia, Shanghai, Columbia and Netherland.

The company has also got a captive power plant in Jhagadia.

Key People:

R D Shroff Chairman & Managing Director

V R Shroff Executive Director

A C Ashar Director – Finance

S R Shroff Vice Chairman

K Banerjee Whole Time Director

J R Shroff Director & Global CEO

Business :

The company operates in three segments :

The agro chemicals segment consists of agrochemicals technical

and formulations. The industrial chemicals segment consists of

industrial chemicals and speciality chemicals. The others seg-

ment consists of traded products. The company offers a range of

products that includes insecticides, fungicides, herbicides, fumi-

gants, plant growth and regulators and rodenticides.

COMPANY ANALYSIS : UPL

Volume : 2

Issue : 7

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BEACON : Page 4

May - 2014

Competitor analysis :

UPL is into agrochemicals business, in which it faces competi-

tion by Rallis india, Gharda chemicals, Indofill industrie, Excel

crop care, PI industries, etc. Intensity of rivalry in these compa-

nies is medium.

Future Strategy:

Focus on Branding : Marketing structures are developed in

all regions to focus on product branding along with pre-

mium brand positioning for new products. Some of the key

brands like Cuprofix, Thiopron are positioned as partners to

organic farming in Europe

Expansion in new geographies : UPL looks forward to en-

ter in the countries with growth potential beyond $ 50Mn

over next 5 years. Some of them are Mexico, Andean Re-

gion, Indonesia, Vietnam and Thailand

Business excellence with digital platforms : Developing

farmer database and providing key farmers CRM facilities.

Providing digital platform to improve sales force effi-

ciency. Utilization of farmer segments by marketing

through various communication platform

Innovation and advanced technologies : Aspire to take in-

novation rate to more than 15% Technologies for Vector

control, Hot & cold Fogging, Warehouse Disinfection

Financial Statement:

Reference:

http://www.moneycontrol.com/company-facts/upl

http://www.uplonline.com

http://www.ibef.org/download/united_phosphorus_23oct.pdf

http://www.uplonline.com/capitalmarketday

UPL annual reports

Concept of the Month VRIO Framework

Why VRIO?

Assessing the limitations of the prevalent SWOT analysis, researchers have noted that it is not sufficient to simply look at the environ-

mental factors influencing a firm’s success. According to the SWOT framework, certain environments such as highly competitive indus-

tries hardly offer favorable conditions for companies. However, this thesis has been proven wrong by several firms that were able to ex-

ploit sustainable competitive advantages within their respective industry (e.g. Southwest Airlines in US airline industry).

In order to overcome these limitations, new models for internal assessment of strengths and weaknesses have been introduced. VRIO

framework is one such model.

What is VRIO?

Looking at a company from the inside, distinctive re-

sources and capabilities are the main means to exploit

opportunities and neutralize threats. The VRIO analysis

does not look at resources and capabilities themselves,

but rather tries to answer what distinctive characteristics

they should have in order to increase a company’s com-

petitiveness. These characteristics are classified as

Value, Rareness, Imitability & Organization

Value

A valuable resource or capability is defined as being

able to contribute to the customer’s needs, at a price the

customer is willing to pay. The external factors such as

available alternatives in the market, industry structure or

customer preferences contribute in determining the

value of a resource. A valuable resource may aid the company in different ways, either contributing to quality, efficiency or innovation of

the production process and the finished product, or by meeting the customer needs well.

Generally speaking, value is a core prerequisite of any resource or capability which will not be required to be classified as a weakness.

A company that wants to survive in the market needs valuable resources. For example,

Rareness

While it is important that resources and capabilities are valuable, a company should also aim at obtaining rare resources in order to

achieve a competitive advantage. In spite of that, valuable but non-rare (common) resources are important, too. These resources and

capabilities can be used to create competitive parity, thus ensuring the survival of the company.

For example, a firm might have many trained workers, but its competitors possess a workforce of equal skill. While both companies need

those workers to prevail on the market, an advantage in workforce could only be obtained if one of the firms had some experts with spe-

cial knowledge.

Imitability

Imitability refers to the degree to which a company’s product, brand, resource or capability can be copied by competitors. Imitability is a

very important aspect in strategic management. When it is difficult and/or expensive for competitors to copy a certain resource, the com-

pany has gained a significant competitive advantage. The extent to which a resource can be copied plays a role in the market performance

of the firm’s product and influences the brand value.

Organization

The final characteristic of the VRIO framework, organization, is defined as the company’s skill at keeping and using their resources and

capabilities in a value-adding way and describes how well a firm exploits the resource in question. A resource might be valuable, rare and

inimitable, but in order to turn this resource into a competitive advantage, it also needs to be identified and exploited in the right way –

otherwise, it might not benefit the company, or even become a weakness.

VRIO Framework

The VRIO framework is a useful tool for analyzing the company in an individual and functional way, exposing strengths and weaknesses

and thereby improving the company’s performance. In doing so, each of VRIO’s four characteristics has to be taken into account.

There are different competitive situations a company can be in relation to its competitors: competitive disadvantage, competitive equal-

ity/parity, short term competitive advantage, unused competitive advantage and long term/sustained competitive advantage.

To attain a sustained competitive advantage is clearly most desirable. Applying the VRIO framework, this advantage can be achieved by

exploiting valuable, rare and inimitable (or expensive) resources in the right way.

However Johannes Kepler emphasizes that an adequate strategy for increasing the company’s value is no guarantee for permanent com-

petitive advantage. As the environment of competition undergoes constant change, the strategy applied by a company also requires con-

stant change, innovation and analysis in order to maintain a competitive advantage.

References

Barney, J. B. (1995): Looking inside for competitive advantage, Academy of Management

Barney, J. (2002): Gaining and sustaining competitive advantage, Pearson Education Inc. New Jersey

Barney, J. B. (2007): Evaluating Firm Strength and Ewaknesses: The Ressource-Based View

Kepler, Johannes: Discuss possibilities and boundaries of the following instruments of strategic management: SWOT, VRIO and BAL-

ANCED SCORECARD; University of Linz, Institute of Strategic Management

Volume : 2

Issue : 7

BEACON : Page 5

May - 2014

Did you know?

1. The name of the official match ball of the 2014 FIFA World Cup

- Brazuca - denotes “national pride in the Brazilian way of life”.

The Adidas Brazuca is primarily manufactured by Forward Sports,

in Sialkot, Pakistan.

2. The recently published The PwC World Cup Index: what can the

dismal science tell us about the beautiful game opined that Group D

is the “Group of Death” and Brazil are the clear favourites, riding on

home turf advantage.

3. This FIFA World Cup is the most expensive World Cup ever

costing an estimated $14 billion, with nearly $4 billion spent on building new stadiums and $900

million for security.

QUIZ OF MAY

1. X = PWC, Y = Deloitte

2. Omnicom Group Inc and Publicis Group SA

3. X = Rupay, Y= National Payments Corporation of India (NPCI)

4. X = Savings Catcher, Y = Walmart

5. Jacobs Douwe Egberts

1. X was recently in the news due to his proximity to our new PM. A S.Y., B.Com and a first generation

entrepreneur, X is the chairman of a conglomerate, known for its port business.

2. Name the company - associated with the 2014 Fifa World Cup - located in Vila Velha, Espírito Santo,

founded in 1929. Also name its founder

3. Recently, on an inaugural flight, a CEO and a CFO were distribut-

ing red caps and mugs to passengers. Name the people and the com-

pany.

4. Name the consulting firm which was recently appointed by an In-

dian MFI to transform itself into a bank in 18 months. Name the

MFI as well.

5. Name the Brand associated with the images.

ANSWERS : APRIL ISSUE

Answer To: simcon.simsree@gmail.com with Subject= simcon_quiz_may_2014

Winner will be recognized.

All Correct Answers will be published in next month’s Edition.

Contributions invited:

To make this feature a successful effort, we seek continued involvement and contribution from our readers, that is

YOU. We invite articles and trivia on themes related to consulting. Be it industry news, consulting trends, a joke, a cartoon or

feedback, we are eager to hear from you. So go ahead, do your research, pen down your thoughts and mail your entries to sim-

con.simsree@gmail.com.

Best Regards,

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Volume : 2

Issue : 7

BEACON : Page 6

May - 2014

Saurabh Kankariya

MMS, SIMSREE

Winner:-