Indian Agrochemical Industry - AgroNews - The Best Agrochemical

106 Pages·2012·5.97 MB·English

October 01, 2012

Indian Agrochemical Industry

Imminent partner in achieving food security…

Tarun Surana Jayant Sharma

[email protected]

Phone: [phone] Shyam Bhatt
Agrochemical Industry

Imminent partner in achieving food security…

Agrochemical Industry plays role of ‘Shiva – The destroyer’ in Agri-input chain
Hindu mythology tells us about Brahma, Vishnu & Mahesh. All 3 play vital roles in world. Brahma is associated with creation or
beginning, Vishnu is associated with life/existence/maintenance and finally Mahesh (Shiva) is associated with end or
destruction. Agri-input industry’s value chain consists of mainly Seeds, Fertilisers and Agrochemicals. Brahma’s role can be

associated with ‘Seed industry’ which creates a new plant, Vishnu – The Fertiliser industry as it helps in sustaining life of plants

and Mahesh – The Agrochemical industry as it destroys/kills pests. It is thus very important part of Agri-input chain that saves

y crop losses due to pests and will continue to help in feeding ever increasing population in decades to come.
r
st
u
d Challenge of feeding the world…
n
By 2050 the world’s population will reach 9.1 billion, 34 percent higher than today. Nearly all of this population increase will
I

occur in developing countries. Urbanization will continue at an accelerated pace, and about 70 percent of the world’s
l
a
population will be urban (compared to 49 percent today). Income levels will be many multiples of what they are now. In order
c
i
m to feed this larger, more urban and richer population, food production (net of food used for biofuels) must increase by 70
e percent. Annual cereal production will need to rise to about 3 billion tonnes from 2.1 billion today and annual meat
h
c production will need to rise by over 200 million tonnes to reach 470 million tonnes.
o
gr
A
…has to be met with higher crop yields

Some 90% of the growth in crop production globally (80% in developing countries) is expected to come from higher yields and

increased cropping intensity, while the remainder coming from land expansion. Arable land will expand by some 70 million ha

(or less than 5%), with the expansion in developing countries by about 120 million ha (or 12%) being offset by a decline of

some 50 million ha (or 8%) in developed countries. On an average, annual crop yield growth rate over the projection period

would be about half (0.8%) its historical growth rate (1.7% average; 0.9% for developed and 2.1% for the developing

countries) according to FAO. This will require extensive use of agri-input chain including agrochemicals, which palys vital role

in increasing yields by saving the crops from pest attacks.

Food consumption to rise faster in developing countries like India with rising incomes and large populations

Grain and oilseed consumption has been rising at a steady pace in the developed world for the last few decades. There is

continuing rise in consumption in most developing regions with large populations and expanding economies. Millions of

people in the developing world now have higher incomes and a strong desire to improve their standard of living especially

quality of their diets. With the world’s food producers (farmers) working to increase production and get more crop from each

unit of limited land, we see robust demand for solutions that help in this endeavor, Agrochemicals being one of the critical

factor among them.

Our top picks – Dhanuka Agritech & PI Industries

Our top picks in the industry are Dhanuka Agritech & PI Industries with 49% & 26% upside respectively. We upgrade UPL to

‘Buy’ recommendation with upside of 31%. We find Rallis and Insecticides India expensive at current valuations, Initiate with

‘Reduce’.

Price target and recommendation

Company CMP* Target Upside (%) Recommendation

Dhanuka Agritech 98 146 49 BUY
Insecticides India 414 412 -0.5 REDUCE
PI Industries 542 685 26 BUY
Rallis India 145 140 -3 REDUCE
United Phosphorus 131 171 31 BUY
*As on 28th Sep 2012

Sunidhi Research | 2
Agrochemical Sector

Financial Snapshot
Company Year Sales EBIDTA PAT EPS Adj P/E P/ Bv EV/ EBIDTA Net D/E ROaE
Dhanuka FY13E 6108 901 639 12.8 7.7 1.9 5.6 0.0 26.7
Agritech FY14E 7051 1022 733 14.7 6.7 1.5 4.8 0.0 25.1
Insecticides FY13E 6737 741 423 33.3 12.4 1.8 8.1 0.2 17.7
India FY14E 8382 964 523 41.2 10.0 1.5 6.8 0.4 16.4
FY13E 10911 1893 1081 43.2 12.5 3.3 8.3 0.5 29.2
PI Ind
FY14E 13427 2420 1430 57.1 9.5 2.5 6.4 0.4 30.2
FY13E 15398 2618 1492 7.7 18.9 4.4 11.3 0.2 16.6
Rallis
FY14E 17890 3086 1809 9.3 15.6 3.7 9.4 0.1 21.3
United FY13E 86852 15199 6689 14.6 9.0 1.3 5.7 0.6 15.3
Phosphorus FY14E 95547 16721 7844 17.1 7.7 1.2 5.0 0.5 16.0
FY13E 25201 4270 2065 22.3 12.1 2.5 7.8 0.3 21.1
Average
FY14E 28459 4843 2468 27.9 9.9 2.1 6.5 0.3 21.8
Source: Sunidhi Research Estimates

Dhanuka Agritech - Fair value of ` 146/share (Upside of 49%), Initiate with “Buy”
DAL will continue to focus on launching new products and keep a diversified portfolio along with tie ups with innovator companies
for marketing their products in India. It will continue to follow its strategy of following asset light model (manufacturing only
formulations) and thus generate free cash flow and clock-in high return ratios. At CMP of `98, DAL is trading at P/E of 7.7x and 6.7x
for FY13E and FY14E. We value DAL at P/E of 10x for FY14E earnings. Initiate with ‘Buy’.

Insecticides India Ltd - Fair value of `412/share (Upside of -0.5%), Initiate with “Reduce”
At CMP of `414, IIL seems fully valued and is trading at P/E of 12.4x and 10.0x for FY13E and FY14E. We value IIL at P/E of 10x for
FY14E earnings (at a discount compared to Rallis and PI Ind due to lower return ratios, generic portfolio). We have factored in 15%
dilution on account of planned QIP in our forecasts. Initiate with ‘Reduce’.

PI Industries - Fair value of ` 685/share (Upside of 26%), Initiate with “Buy”
With return ratios of ~30%, robust growth trajectory and lower tax rates after commissioning of Jambusar SEZ unit, PIL’s earnings
will continue to be in growth momentum. At CMP of ` 542, PIL is trading at P/E of 12.5x and 9.5x for FY13E and FY14E. We value PIL
at P/E of 12x for FY14E consolidated earnings. Initiate with ‘Buy’.

Rallis India - Fair value of ` 140/share (Upside of -3%), Initiate with “Reduce”
Rallis will continue to focus on launching new products in domestic markets with reliance on strong brands. We expect revenue
share of exports to grow further with potential for Dahej Phase 2 upon success in negotiating contracts with clients. It witnessed
massive re-rating in FY10 and FY11. Though it has underperformed broader markets in last year, it is still priced to perfection with no
margin of safety in our view. At CMP of `145, Rallis is trading at P/E of 18.9x and 15.6x for FY13E and FY14E. We value Rallis at P/E of
15x for FY14E earnings. Initiate with ‘Reduce’

United Phosphorus - Fair value of ` 171/share (Upside of 31%), Upgrade to “Buy”
UPL is proxy play to global generic agrochemical markets. Weather is key risk to Its business with challenging season in USA due to
draught, delayed monsoon in India and very wet season in Europe. UPL is banking very high on Rest of the World markets, especially
Brazil. Any weather related issues in this market may threaten growth. UPL is being supported with ongoing Buyback. It is trading at
attractive valuations though deterioration in margins. Rising debt on balance sheet is also a concern. It has Poor ROAE’s compared to
smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit
cycles. At CMP of `131, UPL is trading at P/E of 9x and 7.7x for FY13E and FY14E EPS. We maintain estimates and upgrade target
price to `171 based on P/E of 10x for FY14E EPS (from `145 based on FY13E EPS earlier) as we roll forward valuations to FY14E.
Upgrade to ‘Buy’ (from ‘Accumulate’ earlier).

Sunidhi Research | 3
Agrochemical Industry

Table of Contents

Particulars Page No

Global agriculture & food scenario 5
Indian agriculture & food scenario 7
Debunking some myths 15
Agrochemical industry basics 16
Global agrochemical industry 20
Indian agrochemical industry 22
- Porter’s 5 forces 28
- Comparison of long term sales & profit growth, average margins & return ratios 29
- 2nd Quarter is biggest quarter in the year for Indian agrochemical industry 31
- Sunidhi Agrochem & Seed Index jumps 6x from FY08 32
- Risk factors 34

Company Section

Dhanuka Agritech Limited 36
Insecticides India Limited 51
PI Industries Limited 64
Rallis India Limited 79
United Phosphorus Limited 94

Sunidhi Research | 4
Agrochemical Industry

Global Agriculture & Food Scenario

World population to rise to over 9 billion, faster in ‘Less Developed’ countries
Between 1960 and 2000, global population rose by 100% (3bn to 6bn), and global agricultural
production rose by 150%. Over the same period, the global agricultural labour force rose by 60%,
and the global agricultural land area rose by only 10%. In other words, food production
significantly outpaced population growth. Food production measured in calories per capita per
day has increased steadily since 1961. Agricultural production has risen steadily since 1961 due to
advancement in technology and related factors (e.g. investment, education, institutions and
improved farm management). Even then, almost 1 billion people remain hungry every day.

Exhibit 1: World population (In Millions)
9000
7875
8000
7000
5671
6000
5000
4000
3000
1717
2000 1237 1275
1000
812
0
1950 2010 2050
More Devloped Less Developed

Source: UN, Bunge, Sunidhi Research

Rising population, limited land will continue to reduce per capita arable land
In 1960, world had 3 billion people and had 4.3 ha arable land per person which reduced to 2.2 ha
per person and is set to decline further to 1.8 ha per person by 2020.

Exhibit 2: Per Capita Arable land will continue to decline

8
7 7.5
6
6
5
4.3
4.4
4
3
3
3
2
2.2
1.8
1
0
1960 1980 2000 2020
Population (Billion) Arable land per person (ha)

Source: FAOStat, Sunidhi Research

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Agrochemical Industry

World Is Urbanizing
With rising population, interestingly, world is getting more urbanized. In 1950, rural population
was 2.5x of urban population where as in 2010, both were almost equal. By 2050, urban
population will be 2.3x of rural population. As world urbanizes, it reduces agricultural work force
available in rural areas. In developed economies of Europe and America, agriculture workforce
represents only 5% of total work force while estimates for Africa and Asia suggests that from 70%
in 1980s, it will decline to 50% by 2015.

Exhibit 3: Global Population by Type of Community (millions)
7000
6000
6398
5000
4000 3412
2793
3000 3495
1798
2000
1000
0 737
1950 2010 2050
Rural Urban

Source: UN, Bunge, Sunidhi Research

Growth in World Demand for Grains and Oilseeds
Demand for grains and oilseeds come not just from food but also from feed and fuel. With every
passing decade, demand is rising faster than previous one in CAGR terms.

Exhibit 4: Demand for grains and oil seeds are rising faster

900
2.7%
800
2.9%
700
600 2.8%
500
400
300
1.6%
200
100
0
All Uses Food Feed Fuel
1990 2000 2010 2020

Source: LMC, Bunge, Sunidhi Research

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Agrochemical Industry

Indian Agriculture & Food Scenario

India will need 355 mn tonnes of food grains to feed population of over 1475 million by 2030
The Indian population, which increased from 683 millions in 1981 to 1210 millions in 2010, is
estimated to reach 1412 million in 2025 and to 1475 millions in 2030. To feed the projected
population of 1.48 billion by 2030 India needs to produce 355 million tonnes of food grains. The
expanded food needs of future must be met through intensive agriculture without much
expansion in the arable land. The per capita arable land decreased from 0.34 ha in 1950-51 to 0.15
ha in 2000-01 and is expected to shrink to 0.08 ha in 2025 and to 0.07 ha in 2030. Globally, 10,000
years of historical food production must be matched in the next 50 years for feeding increased
population.

Exhibit 5: Domestic demand for food grains to reach 355 mn tonnes by 2030

Source: ICAR Vision 2030, Sunidhi Research

India is likely to witness massive shortages in pulses, edible oil and sugars by 2021 and
2026 as per ICRIER.

Exhibit 6: Supply-Demand Gap for selected foods

Source: ICRIER working paper - Mittal 2008

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Agrochemical Industry

Food Security Bill raises need to enhance food production urgently
National Food Security Bill proposes coverage of up to 75% of total rural population with at least
46% population belonging to priority households and up to 50% of the total urban population with
at least 28% population belonging to priority households would have 7 Kg of foodgrain per person
per month. Besides, general household would also have entitlement of 3 Kg of foodgrain per
person per month.

$20 bn worth crop is lost to pests
Demand for food products will keep spiraling with the expected rise in population. But as overall
land under agriculture keeps decreasing (with the rise in other uses of land), governments will
focus more on increasing crop productivity/yields. With India’s crop losses – on account of
inadequate and improper use of pesticides – exceeding $20 bn per annum (source: ASSOCHAM),
we believe that higher penetration of pesticide usage will be an important factor for increasing
farm productivity. Consequently, well entrenched pesticide players will benefit from the
macroeconomic factors. The domestic agrochemical industry has shown healthy growth of over
12% CAGR in last few years. At present, the domestic agrochemical industry is worth ~Rs 84 bn
and is expected to grow by at least 12% per annum till 2015.

Low crop yields in India v/s World average
The yield per hectare in India is amongst the lowest in the world - 2.9 mn tonnes per hectare as
compared to 7.8 mn tonnes in the US, 6.2 mn tonnes in Japan, and world average of 4.0 mn
tonnes per hectare. The government is making sustained efforts to improve per hectare yield
which in turn necessitates increased usage of agrochemicals.

Exhibit 7: Per Ha yields in India are lower than world

10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Yields (Kg/Hectare)

Source: FAO, Sunidhi Research

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Agrochemical Industry

Exhibit 8: Crop-wise yields in India v/s world average (Tonne per Ha)
6
5
5
4.2
4
3
2.8
3
2.3 2.2 2.2
1.9
2 1.6
1.1
0.9 0.9
1
0
Wheat Rice Corn Soyabean Rapeseed Peanuts
World India

Source: CIL, Sunidhi Research

Exhibit 9: Significant Yield-gaps exist within states (KG per Ha)

Source: Ministry of Agriculture, Sunidhi Research

Exhibit 10: Trend of gross cropped area, net sown area, net irrigated area, and gross irrigated
area

Source: Agricultural Statistics 2011-12

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Agrochemical Industry

Agriculture has been losing land to other lucrative sectors which are growing slower
Arable land in India is coming down over the last few decades as more sectors compete for land
(such as industries, housing, and education) while agriculture has been losing it. Net Sown area
has remained stagnated at ~141 mn ha over last 2 decades. Net irrigated area has gone up, thanks
to government’s focus on bringing more land under irrigation by undertaking various projects.

Indian agriculture is dotted with small farmers without access to modern agricultural techniques
Landholdings are fragmented in India. Over 80% farmers have less than 2 ha land under
cultivation. That is India’s biggest challenge in increasing yields. The average size of the
landholdings declined to 1.32 ha in 2000-01 from 2.30 ha in 1970-71, and absolute number of
operational holdings increased from about 70 million to 121 million. If this trend continues, the
average size of holding in India would be mere 0.68 ha in 2020, and would be further reduced to a
low of 0.32 ha in 2030. This is a very complex and serious problem, when share of agriculture in
gross domestic product is declining, average size of landholding is contracting (also fragmenting),
and number of operational holdings are increasing.

Declining size of landholdings without any alternative income augmenting opportunity is resulting
in fall in farm income, causing agrarian distress. A large number of smallholders have to move to
postharvest and non-farm activities to augment their income. The research focus should be to
evolve technologies and management options to suit needs of smallholders’ agriculture, and also
to involve them in agri-supply chain through institutional innovations. In 1960, when global
population was 3 bn, per capita arable land was 0.5 ha. Global population is now placed at 7 bn
with available per capita around 0.2 ha.

Exhibit 11: India’s average farm size is just 1.2 ha

Source: FAI, Sunidhi Research

Area under food grains declined at annual rate of 0.02% during 1994-95 to 2009-10

Exhibit 12: Crop Wise CAGR
2.0 1.82
1.63
1.51
1.5
)%
( RG 1.0 0.53 0.53 0.42
AC 0.5
0.07
0.0
-0.5
(0.51)
-1.0
-1.5 (1.29)
eciR taehW rawoJ arjaB eziaM slaereC sesluP sniargdo sdeeS liO
o
F
Source: Ministry of Agriculture, Sunidhi Research
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