RALLIS INDIA LTD

Result Update: Q2 FY 11

C.M.P: Rs.1340.00
Target Price: Rs.1608.00
Date:14th Jan 2011 BUY

Stock Data: SYNOPSIS

Sector: Agrochemicals Rallis is one of India’s leading
Face Value Rs. Rs.10.00 agrochemicals companies, with a centuary
52 wk. High/Low (Rs.) 1590.95/692.61 old tradition of servicing rural markets and
a comprehensive portfolio of pesticides for
Volume (2 wk. Avg.) 4381.00 Indian formers.
BSE Code 500355 Rallis is known for its manufacturing
Market Cap (Rs.In mn) 25790.70 capabilities in crop protection chemicals
and various types of chemistries with
ability to develop new processes and
Share Holding Pattern
formulations supported by the capability to
register new products.
Rallis expands its contract manufacturing
facility at Ankleshwar.
Rallis India Limited a TATA Enterprise has
entered into a co-operation agreement with
Syngenta a leading agribusiness company
based in Switzerland (Syngenta).
1 Year Comparative Graph During the quarter, the company has
reported Net Profit increased Rs. 587.00
million from Rs.457.10 million in previous
year same quarter.
Net Sales and PAT of the company are
expected to grow at a CAGR of 16% and
28% over 2009 to 2012E respectively.
Rallis India Ltd has successfully completed
the acquisition of a majority stake in
Metahelix. Consequently, Rallis has
Rallis India Ltd BSE SENSEX become the holding Company of Metahelix.

Years Net sales EBITDA Net Profit EPS P/E

FY 10 8969.70 1696.90 1010.40 77.96 17.01

FY 11E 11212.13 2029.87 1241.87 63.85 20.77

FY 12E 13454.55 2378.08 1488.94 76.55 17.32

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Peer Group Comparison
Market
Name of the company CMP(Rs.) Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Rallis India Ltd 1326.00 25790.70 77.96 17.01 4.06 180.00

United phosphorus 153.90 71071.7 4.24 36.30 3.69 100.00

Bayer crop science 830.00 32784.0 33.15 25.04 5.86 40.00

Excel Crop Care Ltd 273.75 3012.8 45.95 5.96 1.78 125.00

Investment Highlights

Q2 FY11 Results Update

Rallis India Ltd disclosed results for the quarter ended September 2010. Net sales
for the quarter moved up 15% to Rs.3679.90 million as compared to Rs.3208.50
million during the corresponding quarter last year. During the quarter, the
company has reported Net Profit increased to Rs. 587.00 million from Rs.457.10
million in previous year same quarter. The Basic EPS of the company stood at
Rs.30.18 for the quarter ended September 2010.

Quarterly Results - Standalone (Rs in mn)

As At Sep-10 Sep-09 %change

Net sales 3679.90 3208.50 15%

PAT 587.00 457.10 28%

Basic EPS 30.18 38.16 -21%

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Basic EPS of the company stood at Rs. 30.18

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Break up of Expenditure

Expenditure for the quarter stood at Rs.2797.20mn, which is around 13% higher
than the corresponding period of the previous year. Raw material cost of the
company for the quarter accounts for 52% of the sales of the company and stood
at Rs.1922.6mn from Rs.1598.00mn of the corresponding period of the previous
year. Other Expenditure cost decreased 2%YoY to Rs.504.20mn from
Rs.516.10mn and accounts for 14% of the revenue of the company for the
quarter.

OPM and NPM for the quarter stood at 24% and 16% respectively from 23% and
14% respectively of the same period of the last year.

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 Acquires Majority stake in Metahelix Life Sciences

Rallis India Ltd has successfully completed the acquisition of a majority stake in
Metahelix. Consequently, Rallis has become the holding Company of Metahelix.

Board declares Interim Dividend

Rallis India Ltd has approved the payment of interim dividend of Rs. 9/- per share
(90%) to the shareholders of the Company.

Syngenta and Rallis India enters into a co-operation agreement

Rallis India Limited a TATA Enterprise has entered into a co-operation agreement
with Syngenta a leading agribusiness company based in Switzerland (Syngenta),
whereby the two Companies have agreed to co-operated with each other in relation
to the agrochemical market in India and potential further countries, inter alia with
a view to accelerate and enhance the availability of innovative agrochemical
products and technologies to the farming communities in India and potentially in
other countries.

Bonus Equity Shares

The Company has allotted bonus equity shares of Rs.10 each, fully paid up in the
ratio of 1 equity share for every 2 held to all registered shareholders as on the
record date.

Company Profile

Rallis India, presently a Tata Enterprise, was established way back in 1851 as Rallis
by Pandias Stephen Ralli. It started its journey by buying full pressed jute bales from
press owners in Kolkatta. Rallis grew in stages and eventually took ownership of a
large property at Cossipore comprising cleaning and finishing equipment and
powerful steam driven presses capable of turning out 30,000 export bales of jute yarn
a day. It earned millions of revenue for the firm and jute continued to retain its
prestige till the 1900s.

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Rallis India mainly deals in Agri Business and has emerged as one of the leaders in
the Indian Agrochemical Industry.The company is also in the Institutional business
providing technical and bulk of various molecules to leading companies like Bayer,
Syngenta, Excel, UPL, Gharda, Cheminova etc and has launched product for control
of pest of public health importance. Apart from this the company is having significant
presence in International Business and Contract Manufacturing.

Rallis is known for its manufacturing capabilities in crop protection chemicals and
various types of chemistries with ability to develop new processes and formulations
supported by the capability to register new products.It has contract manufaturing
alliances with several multinational agrochemical companies.

Rallis is one of India’s leading agrochemicals companies, with a centuary old tradition
of servicing rural markets and a comprehensive portfolio of pesticides for Indian
formers.The company is known for its deep understanding of Indian agriculture,
sustained relationships with farmers, quality agrochemicals, branding and marketing
expertise and its strong product portfolio.

Business Areas

Business
Areas

Agri Institutional International Contract

Business Business Business Services
Domestic

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Financial Results
12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in million) FY09A FY10A FY11E FY12E

12m 12m 12m 12m

Description

Net Sales 8523.00 8969.70 11212.13 13454.55

Other Income 29.10 65.80 78.96 90.80

Total Income 8552.10 9035.50 11291.09 13545.35

Expenditure -7292.30 -7338.60 -9261.22 -11167.28

Operating Profit 1259.80 1696.90 2029.87 2378.08

Interest -30.00 -22.70 -3.57 -3.85

Gross Profit 1229.80 1674.20 2026.30 2374.22

Depreciation -169.70 -152.30 -144.69 -151.92

Profit before Tax 1060.10 1521.90 1881.62 2222.30

Tax -347.20 -511.50 -639.75 -733.36

Profit after Tax 712.90 1010.40 1241.87 1488.94

Equity Capital 119.80 129.60 194.50 194.50

Reserves 2486.90 4098.30 5340.17 6829.11

Face Value(Rs.) 10.00 10.00 10.00 10.00

EPS 59.51 77.96 63.85 76.55

*A=Actual, *E=Estimated
*Due to change in Equity Capital from Rs.129.60mn to Rs.194.50mn, so EPS is declined.

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 31-Mar-10 30-Jun-10 30-Sep-10 30-Dec-10

3m(A) 3m(A) 3m(A) 3m(E)

Description

Net Sales 2029.10 2027.90 3679.90 2943.92

Other Income 16.30 16.40 11.00 14.30

Total Income 2045.40 2044.30 3690.90 2958.22

Expenditure -1671.30 -1801.40 -2797.20 -2384.58

Operating Profit 374.10 242.90 893.70 573.64

Interest -5.20 9.00 0.60 -5.72

Gross Profit 368.90 251.90 894.30 567.92

Depreciation -37.00 -35.80 -39.70 -34.94

Profit before Tax 331.90 216.10 854.60 532.99

Tax -113.40 -67.70 -267.60 -165.23

Profit after Tax 218.50 148.40 587.00 367.76

Equity Capital 129.60 194.50 194.50 194.50

Face Value(Rs.) 10.00 10.00 10.00 10.00

EPS 16.86 7.63 30.18 18.91

*A=Actual, *E=Estimated
*Due to change in Equity Capital from Rs.129.60mn to Rs.194.50mn, so EPS is declined.

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Key Ratio

Particulars FY09 FY10 FY11E FY12E

EPS (Rs.) 59.51 77.96 63.85 76.55

EBITDA Margin (%) 14.78% 18.92% 18.10% 17.67%

PAT Margin (%) 8.36% 11.26% 11.08% 11.07%

P/E Ratio (x) 15.02 17.01 20.77 17.32

ROE (%) 27.35% 23.90% 22.44% 21.20%

ROCE (%) 31.95% 35.85% 33.52% 31.27%

EV/EBITDA (x) 8.5 10.13 12.71 10.85

Debt-Equity Ratio 0.31 0.02 0.02 0.01

Book Value (Rs.) 217.59 326.23 284.56 361.11

P/BV 4.11 4.06 4.66 3.67

Charts:

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Outlook and Conclusion

At the current market price of Rs.1326.00, the stock is trading at 20.77 x FY11E
and 17.32 x FY12E respectively.

Price to Book Value of the stock is expected to be at 4.66 x and 3.67 x

respectively for FY11E and FY12E.

Earning per share (EPS) of the company for the earnings for FY11E and FY12E
is seen at Rs.63.85 and Rs.76.55 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 16% and
28% over 2009 to 2012E respectively.

Rallis expands its contract manufacturing facility at Ankleshwar.

Rallis India Limited a TATA Enterprise has entered into a co-operation

agreement with Syngenta a leading agribusiness company based in Switzerland
(Syngenta).

During the quarter, the company has reported Net Profit increased Rs. 587.00
million from Rs.457.10 million in previous year same quarter.

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 On the basis of EV/EBITDA, the stock trades at 12.71 x for FY11E and 10.85 x
for FY12E.

We expect that the company will keep its growth story in the coming quarters
also. We recommend ‘BUY’ in this particular scrip with a target price of
Rs.1608.00 for Medium to Long term investment.

Industry Overview

• Agrochemicals also known as Pesticides are substance or mixture of substances

that are used to avert, destroy or control any kind of pests or unwanted type of
plants or animals that cause harm to crops or hampers the normal growth
process of a crop. As per a Government of India estimate of 2002, value of crop
losses caused due to non-usage of pesticides was around Rs 90,000 crore.
Thereon, assuming losses grew at an average 2%, total losses would have
amounted to Rs 101,355 crore in FY2009, a staggering 2.2% of India's GDP.
• Chemical Industry is one of the oldest industries in India, which contributes
significantly towards industrial and economic growth of the nation. It is highly
science based and provides valuable chemicals for various end products such
as textiles, paper, paints and varnishes, leather etc., which are required in
almost all walks of life. The Indian Chemical Industry forms the backbone of the
industrial and agricultural development of India and provides building blocks
for downstream industries.

• The chemical industry currently produces nearly 70,000 commercial products,

ranging from cosmetics and toiletries, to plastics and pesticides. The wide and
diverse spectrum of products can be broken down into a number of categories,
including inorganic and organic (commodity) chemicals, drugs and
pharmaceuticals, plastics and petrochemicals, dyes and pigments, fine and
specialty chemicals, pesticides and agrochemicals, and fertilizers.

• The Indian pesticide industry has advanced significantly in recent years,

producing more than 1,000 tons of pesticides annually. India is the 13th largest

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 exporter of pesticides and disinfectants in the world, and in terms of volume, is
the 12th largest producer of chemicals. The Indian agrochemical,
petrochemical, and pharmaceutical industries are some of the fastest growing
sectors in the economy. With an estimated worth of $28 billion, it accounts for
12.5 percent of the country's total industrial production and 16.2 percent of the
total exports from the Indian manufacturing sector.

• With a special focus on modernization, the Indian government takes an active

role in promoting and advancing the domestic chemical industry. The
Department of Chemicals and Petrochemicals, which has been part of the
Ministry of Chemicals and Fertilizers since 1991, is responsible for policy,
planning, development, and regulation of the industry. In the private sector,
numerous organizations, including the Indian Chemical Manufacturers
Association, the Chemicals and Petrochemicals Manufacturers Association, and
the Pesticides Manufacturers and Formulators Association of India, all work to
promote the growth of the industry and the export of Indian chemicals. The
Indian Chemical Manufacturers Association, for example, represents a large
number of Indian companies that produce and export a number of chemicals
that have legitimate commercial applications, but also could be used as
precursors and intermediates for chemical weapons production.

The Indian fertilizer industry has succeeded in meeting almost fully the demand
of all chemical fertilizers except for MOP. The industry had a very humble
beginning in 1906, when the first manufacturing unit of Single Super
Phosphate (SSP) was set up in Ranipet near Chennai with an annual capacity of
6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin
in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar were
the first large sized -fertilizer plants set up in the forties and fifties with a view
to establish an industrial base to achieve self-sufficiency in food grains.
Subsequently, green revolution in the late sixties gave an impetus to the growth
of fertilizer industry in India. The seventies and eighties then witnessed a
significant addition to the fertilizer production capacity.

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Fertilizer sector is a very crucial for Indian economy because it provides a very
important input to agriculture. The fertilizer industry in India has played a
pivotal role in achieving self – sufficiency in food grains as well as in rapid and
sustained agriculture growth. India is the third largest producer and consumer
of fertilizers in the world after China and the United States. The growth of the
Indian fertilizer industry has been largely determined by the policies pursued by
the government. The government exercised extensive controls on the pricing,
distribution and movement of fertilizers. The industry is capital intensive and
the production process energy intensive with the combined cost of feedstock
and fuel accounting for anywhere between 55 and 80 per cent of cost of
production, depending on the type of fertilizers.

Key opportunities and challenges for industry

• Low penetration of pesticides:

Estimated size of the Indian economy is US $1 trillion of which Agriculture

accounts for 18%. The Agrochemical industry's size is estimated at US$1bn (Rs
5,000 crore) i.e. 0.1% of the country's total GDP and 0.6% of Agriculture GDP.
Meanwhile, the subsidy burden of urea for FY2009 is estimated at US$21.2
billion or 2% of the total GDP and 12% of agriculture GDP. We believe this
demonstrate the gross under penetration of agrochemical and the opportunity
that is available to the companies in the Sector.

• Biotech seeds threat to agrochemicals:

Scientific research has come up with seeds that have self-immunity towards
natural adversaries. This can be a potential threat to the business of
agrochemicals. Best example of such an introduction in the Indian market is
"Bt Cotton", which resulted in a decline in the consumption of agrochemicals by

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 cotton crop. However, off late there have been few reports of Bt Cotton unable to
develop immunity towards new type of pests.

• Patent expiry of molecules:

Agrochemicals are protected by patents to encourage innovation similar to the

Pharmaceutical industry. Going ahead, many molecules are likely to go off
patent throwing the market open for generic players. As per estimates, total
likely available opportunity through patent expiry stands at US

Determinants of Fertilize Demand

• Rainfall and irrigation facilities

• Relative prices of fertilizers
• Cropping pattern
• Government policies

Rising demand for fertilizers

There has been significant growth in the consumption of fertilizers in last three
years due to overall good monsoon. The growth in NPK consumption was 9.50%
in 2004-05, 10.60 % in 2005-06 and 8.40% per cent in 2006-07.Against the
robust growth in consumption, domestic fertilizer production has remained
range – bound in the last decades. The surge in fertilizers demand and stagnant
to modest increase in production has widened the gap between consumption
and production causing larger dependence on imports. Therefore, the rising
demand for fertilizers is providing ample scope for the companies in this sector

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 to increase their production capacity and volumes thereby, driving the growth
of fertilizer sector.

The installed capacity as on 30.01.2003 has reached a level of 121.10 lakh MT

of nitrogen (inclusive of an installed capacity of 208.42 lakh MT of urea after
reassessment of capacity) and 53.60 lakh MT of phosphatic nutrient, making
India the 3rd largest fertilizer producer in the world. The rapid build-up of
fertilizer production capacity in the country has been achieved as a result of a
favorable policy environment facilitating large investments in the public, co-
operative and private sectors. Presently, there are 57 large sized fertilizer plants
in the country manufacturing a wide range of nitrogenous, phosphatic and
complex fertilizers. Out of these, 29 unit produce urea, 20 units produce DAP
and complex fertilizers 13 plants manufacture Ammonium Sulphate (AS),
Calcium Ammonium Nitrate (CAN) and other low analysis nitrogenous
fertilizers. Besides, there are about 64 medium and small-scale units in
operation producing SSP

The Indian fertilizer industry has come a long way since its early days post
independence. India today is one of the largest producer and consumer of
Fertilizers in the world. India’s production in terms of nutrients (N & P) reached
a level of 155 lakh MT in 2005-06 from 0.39 lakh MT in 1951-52. Similarly,
consumption of fertilizers in terms of nutrients (NPK) has also grown from
about 0.66 lakh MT in 1951-52 to nearly 184 lakh MT in 2004-05.

The Indian Fertilizer industry, given its strategic importance in ensuring self–
sufficiency of food grain production in the country, has for decades, been under
Government control. The Government has over the years, provided subsidies/
concessions through the fertilizer companies to farmers and the manufacturers
have been compensated through various schemes. Though the Government
control helped in meeting the objective of ensuring creation of capacities and
ultimately achieving self-sufficiency in food grain production, it did not
encourage improving efficiencies in the sector.

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Burgeoning subsidy bill and the need to focus on fiscal prudence, Government
polices in recent times are aimed at encouraging efficiencies in the sector. Policy
measures like the new pricing scheme have made the operations of less efficient
players unviable. The Government polices today are oriented towards achieving
the stated objective of total deregulation in the sector. However, the uncertainty
over exact policy parameters and absence of a comprehensive long term policy
has not augured well for the industry. The financial year 2006-07 began with
practically no clarity on the policy parameters for both nitrogenous and
phosphatic fertilizers.

Another important issue confronting the sector is with respect to the feedstock.
Natural gas which is the main feedstock for production of nitrogenous fertilizers
is available in limited quantities and the industry competes with the power
sector for its share. With the Government policy favoring conversion to gas
based units, the demand for gas is only expected to go up in the future, which
may in turn lead to further shortages.

The Indian fertilizer industry has come a long way since its early days post
independence. India today is one of the largest producer and consumer of
Fertilisers in the world. India’s production in terms of nutrients (N & P) reached
a level of 155 lakh MT in 2005-06 from 0.39 lakh MT in 1951-52. Similarly,
consumption of fertilizers in terms of nutrients (NPK) has also grown from
about 0.66 lakh MT in 1951-52 to nearly 184 lakh MT in 2004-05. The Indian
Fertilizer industry, given its strategic importance in ensuring self– sufficiency of
food grain production in the country, has for decades, been under Government
control.

The Government has over the years, provided subsidies/concessions through

the fertilizer companies to farmers and the manufacturers have been
compensated through various schemes. Though the Government control helped

18
 in meeting the objective of ensuring creation of capacities and ultimately
achieving self-sufficiency in food grain production, it did not encourage
improving efficiencies in the sector. With the burgeoning subsidy bill and the
need to focus on fiscal prudence, Government polices in recent times are aimed
at encouraging efficiencies in the sector. Policy measures like the new pricing
scheme have made the operations of less efficient players unviable. The
Government polices today are oriented towards achieving the stated objective of
total deregulation in the sector. However, the uncertainty over exact policy
parameters and absence of a comprehensive long term policy has not augured
well for the industry. For instance, the financial year 2006-07 began with
practically no clarity on the policy parameters for both nitrogenous and
phosphatic fertilizers.

Another important issue confronting the sector is with respect to the feedstock.
Natural gas which is the main feedstock for production of nitrogenous fertilizers
is available in limited quantities and the industry competes with the power
sector for its share. With the Government policy favouring conversion to gas
based units, the demand for gas is only expected to go up in the future, which
may in turn lead to further shortages. Similarly, in the case of phosphates, on
account of the limited availability of phosphoric acid and rock phosphate in the
country, domestic units are dependent to a large extent on imports. In view of
the limited availability of the main feedstock within the country, fertiliser
companies today are exploring the possibility of setting up joint ventures
abroad to tie up their feedstock requirements. Though a few joint venture
agreements have been signed with respect to supply of phosphoric acid, only a
couple of joint ventures have been established with respect to urea. Domestic
players have also not been able to enter into long term gas supply agreements
primarily due to differences over pricing.

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________________ ____ _________________________
Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s
affiliates shall not be in any way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained in this report. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.

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