Farm reforms: Kisanto ‘K’ompanybackoffice.phillipcapital.in/Backoffice/Research... · Fertilisers – DBT and balanced nutrient usage are game changers: India is one of the largest

AGRICULTURE INPUTS

On course for secular and structural growth

By Deepak Chitroda & Surya Patra

Farm reforms: Kisan to ‘K’ompany

INSTITUTIONAL EQUITY RESEARCH

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker‐dealer unregistered in the USA. PHILLIPCAP researchis prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a‐6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA‐member broker‐dealer.

Agriculture Inputs On course for secular and structural growth INDIA | SECTOR UPDATE & INITIATION

4 September 2019

Indian agri‐inputs as a sector has outperformed global and domestic benchmark indices, which is likely to continue. The Indian agri‐inputs sector has outperformed global as well as Indian benchmarks over the last decade despite headwinds such as its seasonal nature, competition from China, and government control. Specifically, agrochemicals delivered 7x return vs. BSE MidCap at 2.3x and global agro index at 1.5.x; leaders PI and UPL delivered 157x/6x. With visible structural growth, led by China’s environment protection clampdown and global climate change, Indian agrochemicals have great upside potential. Indian fertilisers, under pressure due to government control and large import dependency, delivered similar returns (1.9x) as the BSE MidCap Index (2.3x) but outdid the global sectoral index (1x) over the last decade. Fertiliser leaders Coromandel (4.6x) and Chambal Fertiliser (2.9x) outperformed. With policy reforms very likely, Indian fertilisers companies are set for a re‐rating and are likely to surpass historical performance.

Agri‐inputs, though seasonal, is growing secularly: M.S Swaminathan, the Father of the Green Revolution in India once said, “If agriculture goes wrong, nothing else will go right”– apt for an agrarian economy like India. Bill Gates has also emphasised the role of agri‐inputs saying, “I’ve never been shy about my passion for fertiliser. It’s a magical innovation that’s responsible for saving millions of lives from hunger and lifting millions more out of poverty by boosting agricultural productivity.” We agree and believe that agri‐inputs, though seasonal, is a sector that is seeing secular growth.

Global structural developments such as climate change (resulting in higher nutrient needs), China’s conscious effort to cut production, dietary changes, and visible policy reforms by the Indian government provide enough visibility for sustainable‐long term growth for the Indian agri‐inputs industry. Weaker agricultural outlook due to erratic weather combined with the effects of the global trade war in major demand regions such as North America, Europe, and Asia are near‐term concerns, not multi‐year ones.

Fertilisers – DBT and balanced nutrient usage are game changers: India is one of the largest consumers of fertilisers (56mn tonnes) with a major contribution from government‐controlled ones (urea). Subsidy receivables worries have always put pressure on companies’ working capital. However, with key reforms such as DBT, focus on balanced nutrient usage, and efforts to increase the income of farmers, we believe the sector is set for a re‐rating.

Agrochemicals – a structural opportunity for the Indian industry: The global market had seen a steady recovery over the past three year to reach US$58bn in 2018.It is set to grow to US$64bn by 2022, mainly supported by Brazil and India. We see structural changes – such as climate changes, gains from a greener china, and increasing preference for bio products – providing opportunities for agrochemicals.

Leaders are best placed to gain from structural and policy changes: We have covered leading companies in the agri inputs sector with a unique business model, leadership position, strong regional presence and market share, backward integration, expansion plans, and competitive advantage. We are initiating coverage on agro inputs with an ‘overweight’ view. Companies covered:

Coromandel: Non‐urea leader. To benefit from the government’s favourable schemes, balanced nutrient usage, strong crop‐protection segment, and backward integration.

Chambal Fertiliser: New capacity (Gadepan 3) to be a game changer. Moving away from non‐core segments. Government policies to be a major driver (DBT in the true sense).

PI: Leading player with unique business model and strong order book. New verticals in CSM. Benefits from China’s slowdown and blockbuster brands in the domestic segment.

UPL: Becoming an agrochemical giant. Arysta integration to bring in value growth, multiple cost and revenue synergies, and provide a strong foothold in bio‐solutions and seed treatment.

Companies Coromandel International Reco BUYCMP, Rs 380Target Price, Rs 500 Chambal Fertiliser Reco BUYCMP, Rs 153Target Price, Rs 200 PI Industries Reco BUYCMP, Rs 1,155Target Price, Rs 1,350 UPL Reco BUYCMP, Rs 553Target Price, Rs 730 Deepak Chitroda (+ 9122 6246 4117) [email protected] Surya Patra (+ 9122 6246 4121) [email protected]

mailto:[email protected]�


Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

AGRICULTURE INPUTS SECTOR UPDATE

Executive Summary The global agriculture inputs market (fertiliser and agrochemicals) is estimated at US$215bn with India’s contribution at c.12%. Agriculture is an important part of the Indian economy. Farmers’ financial health, along with availability, affordability, awareness and adoptability for agri inputs determines the segment’s demand potential. Agri inputs have significant growth potential over the medium to long term, with opportunities coming from global warming, climate change, the government’s reform initiatives (balanced nutrient usage and direct benefit transfers), and structural manufacturing opportunities as a fall out of China’s industrial clampdown. The Indian agri industry will see steady and secular growth over the medium to long term, led by both government and non‐government factors. Government factors The government’s aim to double farmers’ income and improve the standard of living with the help of various supporting schemes such as crop insurance, high allocation of credit, direct income support (PM‐KISAN), focussing on irrigation, electronic market for farmers, and direct benefit transfer should enable farmers to take informed decisions, improve crop yields, and consume balance nutrients with quality pesticides. Non‐government factors • Climate change: Erratic weather pattern across the globe is becoming a major

concern, especially in terms of achieving food security in the context of a rising population. Already, cropping patterns are changing, and so is the quality of crops/yields and consumption pattern of agri inputs. India is likely to continue seeing rising temperatures leading to erratic monsoons and possible El Nino situations. Climate change will gradually increase pest populations, hurting crop yields, production, and nutrient intake. Agri inputs companies need to address this with better solutions and quality nutrient products, which should create huge opportunities in coming years.

• Rising food demand is a driving force for agri inputs – India’s population is expected to reach 1.73bn by 2050 (ahead of China’s), which will lead to c.70% increase in food demand. At the same time, rising incomes in low and middle class populations is changing India’s food consumption patterns, with more animal products, fruits, and vegetables, replacing traditional foods such as cereals. We believe this will require additional nutrients and quality crops, which will support agri inputs demand.

• Lower yields to support inputs usage –India is the largest producer of pulses and the second largest producer of rice and wheat. Despite this, the country’s yield is below the world’s average mainly as fertilisers and pesticides consumption in India is lower than the world’s average. This means that agri‐input consumption is set to grow over the medium to long term.

• Labour shortage and increasing cost – In India, labour is a significant part of the cost of cultivation (c.50% in paddy).Rising labour costs and shortages will support pesticides (herbicides) demand in India, in line with global trends.

• Exports is becoming a market – India’s advantages of low‐cost production and skilled manpower should support the growth of Indian agrochemicals exports.

• Renewed interest in agriculture from political parties –Agriculture has become the centre of attraction for all political parties (state or centre) over the past few years, and we believe this will surely benefit Indian farmers through an increase in their incomes or through loan waivers.



Fertilisers: DBT and balance nutrient usage are game changers The global fertiliser market is estimated at US$155bn with India’s share at c.15%. The world’s demand and supply is largely influenced by planted area, yield, cropping patterns, crop prices, government subsidies, nutrient management regulations, and innovation. Grains are the largest consumers of fertilisers, followed by fruits and vegetables. Within fertilisers: • The Nitrogen (N) market is highly fragmented due to easy availability of raw

materials; top‐3 producers (includes Indian co‐operative – IFFCO) account for only c.11% of the world’s capacity.

• The Phosphate (P) market is concentrated, with major producers in China, Africa, the Middle East, and the US. Major consuming countries are China, India, and Brazil.

• The Potash (K) market is highly concentrated – top‐3 producers hold c.25% market share (mainly Canada and Russia).

India’s fertiliser consumption was 56mn tonnes in FY19 with urea (nitrogen)’s share at c.55% and DAP/NP/NPK/NPS products covering about 33%. Urea is completely governed by government policies in India; fixed MRP for farmers and flexible subsidy to companies. Non‐urea products were partially decontrolled in 2010; flexible MRPs for farmers and fixed subsidy to companies. The total control of urea is affecting companies negatively with delayed subsidies. With the difference in MRP between urea and non‐urea products at 4‐5x, the consumption pattern of fertilisers has deteriorated, as farmers tend to over‐consume urea to reduce cost of cultivation. The government has taken some initiatives to reduce urea consumption and have efficient production – these include ‘neem coating’ and 45‐kg bag of urea (vs. 50‐kg earlier), freeing up exports, and investment policy to set the urea plants to cover the demand‐supply gap. We expect major initiatives of direct benefit transfer (DBT) to bring a complete change in the sector if it is implemented in the true sense – that is, direct transfer of subsidy to farmers’ bank accounts. This would free companies from the subsidy regime and improve their earnings capability. Key drivers Direct benefit transfers– Government is working on DBT (version 2) in order to transfer subsidies directly to farmers’ bank accounts, just like it is in LPG. The pilot project will possibly be announced soon, similar to phase 1 that involved subsidy based on PoS‐machine purchases. We believe that urea companies will benefit the most, as their subsidy receivables are close to 70% compared to about 30% for non‐urea companies. The New Investment Policy will fill the demand‐supply gap for urea – India is the largest importer of urea (c.17% of global trade). The government’s New Investment Policy with fixed returns and costs in USD terms will support new capacities, reducing India’s large import dependency. We expect Chambal Fertiliser’s newly commissioned plant (Gadepan 3) to benefit the most, helping it to expand its market share and garner higher operating margins. Focus on balanced usage of fertilisers will benefit non‐urea players – Nitrogen‐based fertilisers (mainly urea) are dominating consumption due to their lower prices, creating huge nutrient imbalance across states. We consider the government’s efforts as steps in the right direction to control nitrogen usage and encourage more balanced usage incorporating P and K fertilisers – which will improving crop yield and production. A gradual shift towards more cash crops, pulses, and cereals should also encourage consumption of P and K grades. We believe Coromandel International’s leadership in the non‐urea space should support better growth and margins. Chambal Fertiliser and Coromandel



International are better placed among peers and will benefit the most over the medium to long term, considering their leadership, brand equity, business model, market presence, and financial strength. Presently, channel inventories (due to weak demand scenario because of monsoons) and carry‐over subsidies (getting addressed through the government’s DBT reforms) remain major concerns, but we believe these are truly short term. COMPANIES • Coromandel International (CRIN IN) ‐ Recommend BUY with a target of Rs 500

(9x Sept FY21 EV/EBITDA); 31% upside. • Chambal Fertiliser (CHMB IN) ‐ Recommend BUY with a target of Rs 200 (9x Sept

FY21 EV/EBITDA); 31% upside. Agrochemicals: A structural opportunity for the Indian industry The global agrochemicals market faced demand challenges temporarily in 2016‐17 due to higher crop inventory, leading to dampened realisations. But it has reported steady improvement over the past three years to reach US$58bn in 2018 and is expected to touch US$ 64bn by 2022, supported by Brazil, India, Argentina, and North America. Trade flows in the agrochemicals market are also expected to be focussed on India, China, Brazil, Germany, and the US in coming years. While erratic weather in North America, Asia, and Europe have posed near‐term growth concerns, we believe structural developments provide enough visibility for structural long‐term growth. These include: (1) climate change (please see detailed discussion on page 15), (2) massive curtailment in Chinese agrochemicals manufacturing (previously catered to c.60‐70% of agrochemicals demand), and (3) rising focus towards naturals (bio‐solutions), which incidentally positions the Indian agrochemicals industry at the global forefront. Key drivers Rising trend of biological products – The increasing regulatory standards/ requirements to develop new products, higher product development cost, and severe environmental implications created huge opportunities for biological (bio‐solution) products over the past few years. Also, a limited regulatory requirement and rising interest of farmers is supporting growth of biological products. We expect CAGR of 11% by 2023‐24 for biological products and UPL (after Arysta) and PI Industries are set to benefit the most with their presence in the biological market. Greener China to support Indian companies – China is a global chemicals hub, but it is now targeting zero growth for agri inputs by 2020, with stricter environmental regulations leading to supply destruction over the past few years. We expect China’s problem to benefit India as: (1) Indian companies are proving to be reliable partners for innovators, providing assurance of quality products, (2) Indian companies have good infrastructure and manufacturing capabilities, and (3) India has skilled manpower with dedicated R&D facilities. Climate change to bring growth – Warmer temperatures increases the metabolic and reproductive rates of insects exponentially, and this has affected frequent incidence of pests, creating more cases of crop losses. This will create better opportunities for agrochemical consumption, where companies will need to innovate with better product mix. Changing eating habits is supporting demand – Consumption of meat, poultry, milk, fruits, and vegetables has increased over the past few years from a traditional diet of wheat and rice as people are becoming more health conscious. This is likely to lead to better food consumption and demand for agrochemicals such as herbicides and fungicides – in line with global trends.



High labour costs and shortage to aid growth – Labour is an important part of operating cost of cultivation (more than 50%) and continuous rise in cost and shortages, along with urbanisation, is impacting crop production. As a result, we expect farmers to gradually shift towards higher consumption of agrochemicals (herbicides) to lower the cost of cultivation and improve crop yield. Exports: Domestic demand and exports have contributed equally to the Indian agrochemicals market so far, but exports are set to see rapid progress after China’s self‐imposed rationalisation. We believe UPL and PI Industries will be the best beneficiaries of this visible trend, led by their diversified regional presence, differentiated product offering, low‐cost manufacturing advantage, and strong customer relationships. UPL’s products (after Arysta) will cater to the biological market and it has low‐cost manufacturing capabilities and fast growth prospects, which are likely to offer value growth over FY19‐22. PI Industries’ unique business model (CSM), strong order book of US$1.4bn, and capacity expansion provide better visibility for future growth. COMPANIES • UPL (UPLL IN) ‐ Recommend BUY with a target of Rs 730 – 9x on Sept FY21

EV/EBITDA, implying 32% upside. • PI Industries (PI IN) ‐ Recommend BUY with a target of Rs 1,350 – 18x on Sept

FY21 EV/EBITDA, implying 17% upside. Peer group analysis ‐ fertilisers

Market Cap CAGR FY19‐22e (%) EPS (Rs) PE (x) Companies (US$bn) Rev EBITDA EPS FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22eCoromandel Int* 1.6 2.7 6.9 5.0 30.5 26.3 30.2 35.3 12.5 14.4 12.6 10.8Chambal Fert* 0.9 8.3 13.6 17.2 14.2 18.7 20.2 22.8 10.9 8.3 7.7 6.8GSFC 0.4 9.4 9.1 6.9 12.4 13.6 14.2 Na 6.0 5.4 5.2 NaDeepak Fert 0.1 (8.2) 22.4 80.9 8.0 20.7 26.2 Na 9.7 3.8 3.0 NaGlobal Companies Nutrien (USA) 28.1 3.1 (6.4) 26.2 2.3 2.8 3.4 3.8 19.2 15.9 13.1 11.9Yara Int (Norway) 11.9 4.8 25.6 65.6 1.0 3.3 4.1 4.4 13.0 12.8 10.4 9.6Mosaic co (USA) 6.9 2.6 5.4 24.8 1.7 1.2 2.0 2.5 10.5 14.4 8.8 6.9CF Ind. (USA) 10.3 4.1 8.6 33.8 1.3 2.4 2.9 3.4 30.2 15.9 13.0 11.2 EV/EBITDA (x) ROE (%) ROCE (%) Companies FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22eCoromandel Int* 8.7 9.0 8.0 6.6 26.6 19.2 18.5 18.2 23.6 20.6 20.7 21.1Chambal Fert* 12.2 9.3 8.4 6.7 27.3 21.8 19.5 18.5 10.0 11.1 11.8 13.5GSFC 6.8 4.6 4.4 Na 6.7 7.1 7.1 Na Na Na Na NaDeepak Fert 8.2 5.4 4.9 Na 3.4 8.3 9.8 Na 7.8 Na Na NaGlobal Companies Nutrien (USA) 18.0 8.9 8.2 7.7 18.4 7.0 8.2 8.9 8.9 4.0 4.9 5.9Yara Int (Norway) 11.9 7.3 6.3 5.9 1.8 9.9 11.5 11.8 1.0 6.4 7.5 8.1Mosaic co (USA) 8.3 6.6 5.4 4.9 4.7 3.9 6.7 7.8 2.4 1.4 3.2 4.1CF Ind. (USA) 10.1 9.6 8.8 8.4 8.9 14.1 15.0 17.8 2.2 5.0 5.0 ‐

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research,*PhillipCapital Estimates



Peer group analysis ‐ agrochemicals MCap CAGR (FY19‐21e %) EPS (Rs) P/E (x)

Companies (US$bn) Rev EBITDA EPS FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22eUPL* 6.0 24.6 28.4 22.2 27.8 32.4 41.3 50.7 19.9 17.1 13.4 10.9PI* 2.3 19.0 22.5 20.9 29.7 32.8 41.2 52.5 38.9 35.3 28.1 22.0Bayer CropScience 1.5 21.1 35.7 32.0 69.2 88.6 120.5 Na 44.7 34.9 25.7 NaRallis India 0.4 12.0 20.0 18.5 8.0 9.5 11.2 Na 19.4 16.3 13.8 NaSharda Crop 0.4 12.8 19.8 14.7 19.6 21.4 25.7 Na 14.0 12.8 10.7 NaDhanuka Agritech 0.2 11.7 18.5 12.6 23.7 25.3 30.0 Na 13.1 12.3 10.4 NaInsecticides India 0.2 10.6 15.3 9.0 59.4 59.7 70.6 Na 10.0 9.9 8.4 NaGlobal Companies Bayer 69.3 5.4 10.7 26.9 4.6 7.4 8.4 9.4 14.6 9.1 8.0 7.2BASF 60.7 ‐0.2 ‐0.3 2.3 5.3 4.4 5.0 5.6 11.3 13.5 11.7 10.5FMC 11.0 2.5 3.1 6.2 6.3 5.8 6.7 7.5 13.3 14.4 12.4 11.1Nufarm 1.2 1.4 5.9 15.4 0.2 0.2 0.3 0.3 22.0 28.9 17.1 14.3Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research,* PhillipCapital India Research Estimates

EV/EBITDA (x) ROE (%) ROCE (%)

Companies FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22eUPL* 7.5 6.7 8.6 7.5 14.5 15.1 16.7 17.5 6.8 9.3 11.2 12.9PI* 27.5 23.7 18.8 14.8 17.9 17.0 18.1 19.2 23.6 22.3 23.7 25.1Bayer CropScience 39.6 21.1 15.2 Na 13.1 14.8 15.7 Na 15.6 Na Na NaRallis India 12.9 10.4 8.7 Na 12.5 13.5 14.6 Na 17.0 Na Na NaSharda Crop 9.2 5.8 4.9 Na 14.6 14.1 15.0 Na Na Na Na NaDhanuka Agritech 12.6 8.6 7.3 Na 17.7 17.6 17.9 Na Na Na Na NaInsecticides India 8.9 7.3 6.4 Na 20.3 16.6 17.3 Na 22.7 Na Na Na

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research,* PhillipCapital India Research Estimates



TABLE OF CONTENTS

A G R I I N P U T S

Farm‐economics perspective ......................................................................................... 9

Agri inputs sector: An overview ................................................................................. 11

Global agriculture outlook ........................................................................................ 20

F E R T I L I S E R

The fertiliser sector .................................................................................................... 24

Indian fertiliser dynamics ........................................................................................... 27

Investment rational for fertilisers ............................................................................... 32

Comparative analysis of fertiliser companies ............................................................ 39

FERTILISER COMPANIES

Coromandel International Ltd (CRIN IN) ..................................................................... 44

Chambal Fertiliser Ltd (CHMB IN) ............................................................................... 63

APPENDIX

Types of fertilisers: Explaining N, P, and K ................................................................... 77

A G R O C H E M I C A L S

Agrochemicals sector ................................................................................................. 98

The Indian agrochemicals market ............................................................................ 110

Comparative analysis of agro‐chem companies ....................................................... 121

AGRO CHEMICALS COMPANIES

PI Industries Ltd (PI IN) ............................................................................................. 125

UPL Ltd (UPLL IN) ........................................................................................................ 142


AGRI INPUTS SECTOR UPATE

Farm‐economics perspective Farm economics plays an important role in understanding farmers’ affordability, profitability across the various crops/states, and the ultimate structure of the agri‐inputs sector. We have analysed Indian farm economics based on our interaction with large farmers, distributors, channel partners, and industry peers. Our observations are detailed below: Indian farm economics in pictures

Source: Industry, PhillipCapital India Research, in bracket as % of head cost Factors that are important for crop realisation that farmers receive • Farmers’ crop earnings are largely dependent on mandi (marketplaces in India)

market prices or MSP (Minimum Support Prices). Generally, mandi prices are almost equal to MSP but during a good harvest when the supply situation improves, these prices tend to drop way below MSP.

• Mandi price is a deciding factor for farmer’s earnings, as the government procures only about 30% of farm produce (mainly wheat and rice only) at MSP. Moreover, delays in government procurement and limited procurement centres force farmers to sell at prevailing mandi prices.

Since the farm produce realisations are not certain, cost of farming decides the true earnings for farmers. Here are a few observations about farm costs: • Agri inputs costs – covering seed, fertilisers, and agro chemicals –account for

c.25% of total farming cost. o Within agri inputs, fertilisers is the largest cost component (50‐55%).

However, the tendency of farmers towards urea procurement remains higher than for complex fertilisers (NP/NPK/NPS) due to the former’s lower prices. For example, DAP is priced at 5x of urea.

o Agrochemicals account for 15‐17% of total agri‐inputs costs. The consumption levels of agrochemicals in India is one of the lowest – c.300gm/ha compared to the world average of 4kg/ha. Farmers’

FARM

ERS

COST

Agriculture produce realisation

Agri Inputs cost (25%)

Fertiliser (13%) Agrochemicals (4%) Seeds (8%)

Other operating cost (75%)

Labour costs (65%)

Human LabourCost (43%)

Machine Labour(22%)

Other costs (10%)

MSPact as a benchmark to Mandi prices Mandi prices is a key to crop realisationDelay and limited purchase by govt. forces farmers to offload at Mandi pricesFA

RMERS

REVE

NUE

AGRI IN

PUT C

OST

OPERAT

ING CO

ST

Fertiliser is the primary and largest (50‐55%%) agri inputs cost for farmers who procures 40‐50% ahead of the season. Agrochemicals covers 15‐17% of agri inputs cost and procurement highly relies on pest incidence, planting areas, rainfall, new products and prices. Labour (man/machine) is a critical and important

factor with 75% share in operating cost.Cost is significant in rice planting states like West Bengal, MP and AP.

Farmers’ actual earnings from crop produce, their cost of cultivation (operating cost), and agri‐input costs provides true insights into agri inputs sector dynamics – i.e., outlook for demand, growth, and profitability among others.



procurement depends on multiple factors such as pest incidences, sowings areas, distribution of rainfall, and price.

o Seeds are basic agri inputs, accounting for c.33% of total agri inputs cost. • Other operating costs includes human labour, machine labour, and irrigation

charges. These are the most critical factors and form 75% of total farming costs. o Human labour costs are the largest component for Indian farmers, who still

dependent a lot on human labour. o Rising urbanisation or moving towards other businesses areas has caused

labour shortages, leading to rising wages. In fact, this is a common concern for the entire emerging world and that gives rise to a huge demand opportunity for pesticides (herbicides).

State‐wise observations – Agri‐input costs vary from state to state based on farmers’ affordability, availability, and type of crops. Average seed/fertiliser/pesticides costs are 33%/52%/14% of total agri‐input costs in the three major crops across major sowing states. • In paddy, West Bengal, Uttar Pradesh (UP), Andhra Pradesh (AP), Madhya

Pradesh (MP), and Tamil Nadu (TN), c.60% of agri‐input cost constituted fertiliser and c.13% pesticides.

• Punjab uses less fertiliser at c.40% and more pesticide at c.45%. • AP has balanced usage – with a fertiliser/pesticide share of 62%/23%. • In wheat, fertiliser usage was c.55% in major producing states; Punjab was the

only state with high pesticides usage. • Other states – Rajasthan, MP, UP, Bihar – have a tendency to use unbranded

pesticides or very limited volumes (c.1% of operating cost). AP, Gujarat, and Haryana – major cotton producing states – saw average 45% share in fertiliser cost, while pesticides share was 24%.

Labour cost is a major contributor in operating costs of cultivation

Fertiliser is a major cost in agri inputs

Source: Ministry of agriculture, Phillip Capital India Research, Based on FY15 cost

0%

20%

40%

60%

80%

100%

AP

Tamil Nadu

UP

Punjab MP

W Ben

gal

Punjab

Rajasthan

MP

UP

Bihar

Haryana AP

Gujarat

Paddy Wheat Cotton

Others

Pesticides

Fertiliser

Seed

Labour

0%

20%

40%

60%

80%

100%

AP

Tamil Nadu

UP

Punjab MP

W Ben

gal

Punjab

Rajasthan

MP

UP

Bihar

Haryana AP

Gujarat

Paddy Wheat Cotton

Pesticides

Fertiliser

Seed

Average seed/fertiliser/pesticides costs are 33%/52%/14% of total agri‐input costs in the three major crops across major sowing states



Agri inputs sector: An overview Agriculture inputs (fertilisers, pesticides, and seeds) are essential for the growth of the agriculture sector and farmers’ income. In this report, we focus mainly on the Indian fertilisers and agrichemicals (pesticides) market. The global fertiliser and pesticide market was estimated at US$215bn in 2016/17 with India’s share at c.12% and China at c.30%. Together, India and China hold about 40‐45% of the global market. We expect both segments to see substantial growth in India over the medium to long term because of the following reasons: 1. High dependence on agriculture: Over 50% of India’s population is engaged in

agriculture and allied sectors, which are not only responsible for the country’s food security, but also for rural sector growth (a focus area of the government) including foods, consumables, and automobiles.

2. Government support: Farmers distress over the past few years has forced the government to take necessary steps – including introducing long‐terms schemes such as PM‐KISAN, crop insurance, and investing in irrigation. • We believe the farmers’ distress problem is due to high production and

limited procurement. This will resolve once government schemes are fully implemented, especially DBT and irrigation.

• All government schemes are aimed at minimising business risks including monsoon, storage, financing, power shortage, crop damage, deteriorating soil quality, and below‐par market value. The government’s goal of doubling farmers’ income by 2022 hinges largely on the implementation and success of these schemes.

• Introduction of a new investment policy with assured returns and reviving five urea units should help India to become self‐sufficient in 3‐5 years.

• Implementation of DBT in the true sense (directly to farmers’ bank accounts) in the coming years should free fertiliser companies from the subsidy system, which is expected to reduce working cost and improve returns.

3. Changes in dietary patterns, climate change, lower yield, crop losses, and rising

food demand are some of the major concerns that the agriculture sector faces. But these are also opportunities for the agri inputs sector over the medium to long term.

4. Exports destination: Out of the total pesticide revenue in India, c.50% comes from exports as India has the advantages of low‐cost production, skilled manpower, strong R&D capability, and reliable supply – comparing favourably with China in the light of the latter’s present uncertainty.

5. Balanced usage of nutrient: Farmers are gradually moving towards balanced nutrient usage in order to derive better yields, rather than relying on traditional products such as urea alone. This shift is expected to benefit NP/NPK/NPS consumption over the long term, which, coupled with the price decontrol of non‐urea fertilisers, should ensure value growth.



Government moves that will drive the sector Crop insurance: The Pradhan Mantri Fasal Bima Yojana (PMFBY) should benefit farmers in terms of minimising risk, allowing them to focus on leveraging farm productivity. In FY18, c.26% of India’s farming area was covered under crop insurance; major crops covered were oil seeds, pulses, fruits, paddy, and wheat (each with 30‐40% share in gross sown areas). Credit facilities: Credit flow to agriculture has seen 14% CAGR in the past five years to c.Rs 11.6tn in FY18. Better allocation and timely credit facility at affordable rates will support farmers in improving production and yield. Agriculture credit has grown four times over the past decade

Source: Ministry of agriculture, Phillip Capital India Research Income support: As cost of cultivation increases and margins narrow, it becomes essential to provide income support so that basic necessities are at least met. A direct income support to 145mn farmers of Rs 6,000 per family; Rs 870bn scheme under PM‐KISAN – will certainly improve the ability of these farmers to consider buying quality agri inputs for better yields. About 70% of landholders are marginal farmers with less than one hectare land

Source: Ministry of Agriculture, Phillip Capital India Research, land area in hectares Irrigation: From 2015, the government had aimed to spend Rs 500bn on 99 irrigation projects over the next five years, but so far, it has spent only Rs 90bn. In FY15, the share of irrigated areas was c.48% and share of micro irrigation was c.5% of gross areas sown. We expect the government’s emphasis on ‘more crop per drop’ under Pradhan Mantri Krishi Sinchayee Yojna (PMKSY) to support farmers in terms of better water availability. This will benefit the sector over the medium to long term.

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Tube wells are the dominant irrigation sources with c.50% share

Source: Ministry of Agriculture, Phillip Capital India Research Soil Health Card (SHC): SHC will play an important role over the long term to improve farmers’ incomes. The more their yield increases, the more inclined they would become towards balanced agri inputs. About 70% SHCs collected were from west and north regions in India

Source: Ministry of Agriculture, Phillip Capital India Research, sample collected up to Oct 2018 e‐Market: National Agriculture Market or eNAM is an online platform for trading agro commodities. It has linked 585 markets (APMCs) in 16 states with 2 union territories and has 4.5mn farmer memberships. The government is also planning to connect 22,000 Gramin (rural) Agriculture Markets and local markets on the same platform, so that farmers get a better price. By January 2019, market transactions worth Rs 600bn were recorded on the eNAM platform. Direct Benefit Transfer: The implementation of direct benefit transfer (DBT) for fertilisers hasn’t yet stabilised due to (PoS machines) network issues in some remote areas and we believe once the current mechanism is finalised, the second phase (version 2) of directly transferring subsidy to farmers will be implemented. The government may also use the direct transfer mechanism after linking land records (among other measures) for pushing other benefits such as recommending agri‐inputs based on soil health records. According to recent media reports, the government is expected to implement the second phase of direct transfers with pilot projects (like it did in phase‐1 in 2017) in major states in coming months.

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Non‐government factors that will support demand Climate change Climate change entails factors such as rising temperature, heat waves, rainfall, rising pest and disease incidences for various crops, changes in quality of foods, etc. Because of climate change, agriculture is seeing volatile demand and supply across the globe despite improvement in agri‐technologies, new varieties of products, and increase in irrigation facilities. It is likely to boost insect activity and crop‐loss, providing huge opportunity for agri inputs. Impact of climate change: Many experts believe that climate change will have a mixed impact on agriculture across the globe. Countries are likely to face low crop production in low latitude areas while northern countries could see mixed impact. For example, South Asia, Africa, and Latin America are likely to experience warm and dry weather while USA, Canada, China, and Europe will see erratic weather. India: Average temperature has increased by c.10% over the past century

Source: Govt. of India, Phillip Capital India Research, average temperature for the year According to experts, climate change is likely to have an impact on agriculture in many ways such as: • Changes in agriculture patterns (sowing pattern based on availability of

water/irrigation). • Productivity of crops in terms of quality and quantity. • Adoption of environmental friendly varieties of products. Huge opportunities for agri inputs: Climate change is likely to increase pest populations as it increases their metabolic rate and number of breeding cycles, which will affect crop‐yield and production. According to some studies, it will bring in new pest problems which would need new crop‐protection solutions, creating big opportunities for agri inputs, as increasing resistance to weeds, pest, viruses, fungi, and bacteria will lead to more crop losses and create larger demand for agrochemicals. According to research by Washington University in 2018, a c.2° Celsius increase in global mean temperature lowers crop yields for corn by 31%, rice by 19%, and wheat by 46%. A study by Food and Agriculture Organisation (FAO), a specialised agency of the United Nations, suggests that the rising temperatures are likely to hurt India and Africa the most in terms of agriculture production, while North America and Eastern EU will gradually gain prominence in global agriculture trade led by rising agriculture production, supported by warm weather. The study also says that climate change will increase usage of fertilisers, as the nutrient requirement to bring in quality crop

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Climate change and agriculture are interrelated. Considering its impact on agriculture and human life, it is becoming quite important.



production increases. Simultaneously, demand for pesticides will see rapid growth over the long term, since the weather change will increase pest incidence. In fact, climate changes will bring many changes in the global agriculture‐market dynamics with changes in trade flows, prices, crop production/yields, impact on agriculture GDP, etc. Here are some highlights from the FAO study: • Agriculture production: Africa, Middle East, South and South Asia regions to see a

decrease in crop production by 2050. India and Africa to be affected the most. • Agriculture Trade: Russian Federation and North America (Canada) are likely to

see a rise in exports of agriculture commodities while North Africa, West Africa, and India will see a decline in net exports.

• Food prices: Similar trends are visible in food prices – India and West African countries will see larger increase in food prices compared with other regions.

Rising temperatures to hurt India, Africa most in agri production by 2050

Source: FAO, PhillipCapital India Research Climate change to increase food prices in Western Africa and India by 2050

Note: The picture above shows change in food prices from 2011 to 2050.

Source: FAO, PhillipCapital India Research.



Global trade to move towards North America and EU

Source: FAO, PhillipCapital India Research Better cropping patterns and management of agriculture practices are likely to partly offset the adverse impact of climate changes on yields and crop production. This includes adoption of quality nutrients (fertilisers) and usage of pesticides, expanding the arable areas, efficient irrigation, and water storage, etc. Regional impact and opportunities The regional impact of climate change on crops yields and production across the globe will vary in the coming decades: Regional impact of climate change Regions Likely impact on agriculture crops/yields Climate changes Asia East and South Asia are likely to see increase in crop yields,

whereas Central and South Asia will see a decrease. India, Bangladesh, and Vietnam will see reduction in rice crops with rising sea levels.

Impact is already clearly visible in Asia across countries. India has seen a gradual increase in temperature with erratic monsoon including the El Nino situation. China is seeing severe cold weather in the winter with hot and humid summers. Its northern provinces saw rise in temperature and water shortages, affecting agriculture production while southern provinces saw more rainfall and floods.

Europe South, East and Central Europe parts are expected to experience crop losses and yield with warming temperature, while northern areas will gain with increasing crop yields.

Warmer weather in Europe affected the length of planting in many parts of Europe; many crops were observed to have been harvested several days earlier than normal. North Europe’s productivity may increase with a longer growing season. South Europe will see extreme hot weather, reducing water availability, impacting agriculture productivity.

Latin America

A major region for agriculture products such as corn, soybeans, wheat and rice is likely to experience mixed impact across countries such as Brazil, Argentina, and Mexico, which are likely to see a drop in crop yields, majorly for corn. Wheat is likely to see lower production from Brazil, Venezuela, and Colombia.

Climate change is likely to raise temperatures by 3‐4° C in the coming decades, with increasing chances of droughts/floods. In 2018, Argentina already suffered with the worst drought in 30 years, resulting in record low soybean production. Brazil and Argentina are expected to see negative impact compared to Uruguay, Chile, Ecuador, and Peru.

North America

Erratic weather to have mixed impact on North America. Experts believe many crops will benefit from low levels of warm weather, but hot weather will affect crops yields and increase the pests/weed incidences.

Western North America is becoming warm compared to Eastern America with changes in climate. However, USA and Canada are expected to see crop production rising gradually as warm weather is expected to support crop production cycles and improve yields.

Source: Industry, PhillipCapital India Research

North America and Eastern EU to gain prominence in global agri trade led by rising agri production supported by warm weather by 2050



Food demand is set to rise – a positive for agri inputs The agri inputs sector will play an important role ahead in avoiding food shortages and providing quality food with better nutrients in the light of shrinking arable land. Here are some key factors to consider: • India’s population is expected to reach 1.73bn by 2050 (ahead of China’s) which

will lead to c.70% increase in food demand. • Rising incomes in the low‐ and middle‐class population has led to changes in food

consumption patterns such as consumption of animal products (poultry, meat, and eggs), fruits, and vegetables overtaking cereals. According to industry estimates, increasing demand of horticulture, livestock, and fisheries will overtake the demand growth for cereals. According to the IARI (Indian Agriculture Research Institute) research paper, from 1983 to 2011, consumption of cereals declined 21% to 133 kg per capita per year from 168. In the same period, consumption of milk/meat/fruits/vegetables/edible oils increased by 44%/40%/260%/17%/79%.

• With rising population, arable land per person is declining (from 0.34 hectare in 1961 to 0.11 hectares in 2016;a c.70% decline over almost 12 decades) with increasing urbanisation, and use of land for industrial purposes and for animals feedstock.

Indian food consumption pattern: Moving towards fruits/vegetables, milk, meat Crops 1983 2011 Change (%)Cereals 168 133 ‐21%Pulses 12 10 ‐15%Sugar 11 10 ‐12%Edible Oil 5 9 93%Vegetables 48 56 17%Fruits 3 12 261%Milk 45 65 44%Meat/Fish/Eggs 5 8 39%

Source: insa.nic.in survey, Phillip Capital India Research, Kg/capita/year Lower yields will improve with better agri inputs usage India is the largest producer of pulses and the second largest producer of rice and wheat. Despite this, the country’s yield is below world average mainly as fertilisers and pesticides consumption is lower in India. Therefore, agriculture inputs, which have already played a big role in increasing production in India over the past decades, are expected to play a significant role in improving yields ahead. Agri inputs companies have various field and training programmes in place under which farmers are being educated to improve yields by using better nutrients and the right quantity and quality. These companies expect consumption to grow over the medium to long term. India: Low crop yield provides opportunities for better agri inputs demand

Rice Wheat Pulses Rank Yield Rank Yield Rank Yield China 6,866 China 5,396 India 588 India 3,790 India 3,034 Canada 2,011 Indonesia 5,236 Russia 2,684 Myanmar 1,508 Bangladesh 4,586 USA 3,541 China 1,732 Vietnam 5,574 Canada 3,470 USA 2,034 World 4,577 World 3,401 World 958

Source: Ministry of Agriculture, Phillip Capital India Research, Kg/hectare

Consumption pattern has moved towards fruits, vegetables, milk and meat over the past 3 decades, with increasing standards of living

Low crop yields in India vs. competing regions provide a better outlook for agri inputs consumption in the country



Labour shortage and increasing cost Labour cost is significant for cost of cultivation (c.50% in paddy) and is rising due to urbanisation. We believe high costs and shortage will encourage farmers to use more herbicides in coming years (this is a global trend). Exports are becoming a market India’s advantage of low‐cost production with skilled manpower should support the growth of the Indian agrochemicals sector. Major advantages towards strengthening exports are: • Low production cost and R&D strength. • Exports incentives. • Opportunities from China’s slowdown. Renewed interest in agriculture from political parties: Agriculture has become the centre of attraction for all political parties (state or centre) over the past few years, and we believe this will surely benefit Indian farmers by either increasing their incomes or through loan waivers. Key takeaways for the agri inputs sector • In the medium to long term, the agri input sector has significant growth potential

– with farmers increasingly able to afford products, opportunities from global warming, and favourable government policy.

• The fertiliser sector will be in a better place considering prospects of DBT and the aim of the government is to free companies from the working‐capital cycle over the long term. Besides, farmer spending is higher on fertilisers with its well organised and defined products, compared to pesticides, where export‐market advantages are higher.

Agri inputs: Various parameters Parameters Fertiliser Pesticides Nature of business Fertiliser is a major and necessary part of farming, as it provides nutrients to

plants and increases crop production and yields. Pesticides provide protection from pest/insects/weeds, and play an important role in improving crop yields.

Product offerings Selected product offerings with limited competition Large basket of product offerings with intense competition Business structure Fertiliser sector is fully organised requiring a large manufacturing base or is

dependent on imports. About 30% of the pesticides industry is controlled by the unorganised sector and there are many manufacturers (active ingredients (AIs)/formulations/imports)

Regulations Urea is fully controlled by the government (price and cost) and non‐urea products are partially controlled under nutrient‐based subsidy policy.

Pesticides are controlled under Insecticides Act 1968 and there is no pricing control.

Raw material sourcing

Urea – natural gas cost is passed through for companies as reimbursement via subsidies. Government sources large requirements as imported LNG. Non‐urea – potash is 100% imported, phosphate rock is 80‐90% imported, ammonia is c.90% imported, phosphoric acid is largely imported

Sourcing of raw materials or finished products varies at different companies with some dependency on China.

Competition Urea – Very low competition, as about 20‐25% of consumption is still imported. Non‐urea – Competition is limited, as there are more product offerings, but India is still an importer of major products such as DAP and MOP.

Pesticides industry has very high competition, as the share of the unorganised sector is high. Branding of products, farmers’ education at the field‐level through marketing representatives, and regular new product offerings play an important role in growth.

Role of monsoon Monsoon has a limited impact on consumption of fertiliser, as major usage is before the sowing takes place.

Monsoon plays an important role for consumption of pesticides and distribution of rainfall across states. Demand is largely function of pest incidence for specific crops (largely paddy and cotton).

Target market 100% consumption within India, but recent announcements say exports to companies allowed. This may increase exports.

c.50% of India’s total agrochemicals revenues are from exports. Therefore, the demand and supply situation in the export market plays an important role for growth.

Medium‐to long‐term outlook

Government initiatives and long‐term demand will support the fertiliser sector: • Direct benefit transfer to farmers’ bank accounts (subsidy). • Doubling farmers’ income by 2022. • Export allowance by the government. • Balanced usage of fertilisers. • Climate change (nutrient requirement to increase). • Various government schemes for irrigation, insurance, etc.

Government initiatives and long‐term demand will support the agrochemicals sector. • Doubling farmers’ income by 2022. • Climate change (nutrient requirement to increase). • Various government schemes for irrigation, insurance,

etc. • Rising labour costs support herbicides usage.

Source: PhillipCapital India Research



We like Chambal Fertiliser, Coromandel, PI Industries, and UPL In both fertilisers and pesticides, Chambal Fertiliser, Coromandel, PI Industries, and UPL are better placed among their peers mainly due to: • Unique business model • Leadership position • Strong hold in the regional market • Expansion plans Short‐term concerns surrounding erratic weather will have a limited impact on the H2 FY20 earnings of these companies due to the recent recovery in monsoon, their presence in exports markets (UPL, PI), better product mix (urea for Chambal and unique grades for Coromandel), and limited inventories in the system compared with other players. These companies will benefit the most over the long term because of the implementation of government schemes and changes in product preferences.



Global ‐ Agriculture outlook While Latin America and Europe’s agri‐inputs markets are favourably placed for agri‐year 2019‐20, North America is set for a decline. Back east, Asia is set on a no‐growth phase, mainly led by weak monsoon in India and with China facing multiple headwinds. Regional insights: Prospect for agrochemicals demand in 2019‐20 based on agriculture outlook Parameters North America Latin America Europe Asia Major crops in the region Corn, soybean Soybean, corn, wheat Cereals, oilseeds, wheat Wheat, rice Crop planting Weak (USA) Favourable (Brazil/Argentina) Moderate Moderate (India) Crop production/yield Moderate High High Moderate Crop prices Moderate High Moderate Moderate Weather Erratic Good Good Erratic Outlook for 2019 agrochemicals demand Weak High High Moderate

Source: PhillipCapital India Research N. America: To see lower demand in the short‐term on erratic weather, trade war • The USA plays an important role in the world agriculture exports market, largely

led by its major crops of corn (annual production of 367mn tonnes, 33% of global output) and soybean (123mn tonnes, 34%).

• So far in the US sowing season, corn/soybean saw just c.60%/c.62% planting by early June; the lowest since 1990s. The weakness in sowing is due to a delay caused by a persistent wet spring and adverse weather patterns across parts of the US. Even Canada’s corn production remains low, with a decline in sowing areas and planting delays.

• Recently, the ongoing trade wars with China have also affected crop production, yield, and trade. The USDA (the US Department of Agriculture) has projected a 5%/9% decline in corn/soybean production for agri year 2019‐20.

• If the tension between the US and China continues, the agriculture outlook could be hurt badly, resulting in a change in planting pattern. However, it could actually gradually improve the outlook for corn production, as farmers would replace soybean crop with corn. As a result, the outlook for agri inputs companies (mainly fertilisers and some bio‐stimulant) will improve as corn consumes more nutrients than soybean.

• In the longer term, the USDA expects planted areas for 8 crops – corn, soybean, wheat, rice, cotton, sorghum, barley, and oats – to remain more or less unchanged until 2028, but rising yields could support an increase in production and agri‐input demand.

Latin America: Healthy growth at the cost of falling US exports due to trade war • Brazil and Argentina are major crop producing countries in South America, and

both have transformed over the past few decades from labour‐intensive farming in small land areas to large‐scale commercial farming. Soybean is a leading crop produced there and both together produce the largest chunk with an annual production of 171mn tonnes, or c.46% of global output.

• Brazil has largely benefited towards the end of 2018 because of increased exports of soybean to China (replacement of supply from the US). This should continue in 2019. However, the recent outbreak of African swine fever in China may result in lower soybean exports to China.

• Corn is a second leading crop in Latin America, with a combined annual production of 125mn tonnes by Brazil and Argentina. As per FAO (The Food and Agriculture Organisation), production of corn/soybean is expected to rise by over 20%/5% in 2019‐20. This outlook is complemented by better weather conditions and higher planting areas. Poor corn production prospects from the US also support Brazil and Argentina’s outlook.

• In the medium to long term, Brazil and Argentina are likely to see better crop production (corn, soybean and wheat) supported by weather conditions, crop



yields, and cost competitiveness with the North American market. This is expected to generate better demand for agri inputs in the region.

Asia: Delayed India monsoon, multiple China headwinds = dull growth outlook • India: Kharif planting areas for main crops (rice) are likely to be hurt because of

the delayed monsoon. Uneven distribution of rainfall across various states is likely to reduce planting areas of other crops such as cereals too. However, a recovery in monsoon over the past few weeks provide a better visibility for rabi season demand.

• China: Although this country consumes most of its produced crops, it is one of the leading producers of rice (with 28% global share), corn (25%), and wheat (18%). It is also the leading importer of soybean. However, outlook of the Chinese agri input market is dull because of: (1) large stockpile (especially wheat) resulting in reduction in minimum purchase price, (2) trade war with the US, (3) spread of African swine fever, and (4) below‐average rainfall since sowing. Additionally, China’s focus on reducing agrochemicals consumption (as per its 2020 plan) and rising input costs makes the long‐term agro input growth outlook bleak.

• Favourable weather condition for winter‐spring rice (dry‐season rice) and summer‐autumn rice (wet‐season rice) provides a relatively better FY20 growth outlook for the south‐east Asian region (Indonesia, Vietnam, Thailand, Philippines).

A separate study of the global inventory position (as per the World Bank) of leading crops such as corn, soybean, rice, and wheat, suggests that inventory levels have gone up in 2019;soybean and wheat inventory has touched two decade highs. This indicates subdued production growth in the upcoming season, which will result in weaker agri‐input demand. Stock‐to‐use ratio of leading crops globally hints at softer agri‐input demand

Source: Bloomberg, PhillipCapital India Research, Avg % of stocks to use for CY

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Trade war and weak agriculture in the US keeping soybean and corn prices volatile

Source: World Bank, PhillipCapital India Research, Monthly prices Short‐term global peers’ outlook: Fertilisers a mixed bag; agrochemicals look weak Global fertiliser companies, Nutrien and Yara International, expect growth to remain subdued in 2019, but see a sharp recovery in 2020, supported by high crop prices and low raw‐material costs (gas prices). Agrochemicals companies (except FMC) have seen weak performance in 2019 so far, led by poor North American demand and the ongoing trade dispute. Companies have guided for slower/declining growth in H2 2019 due to a weaker agriculture outlook mainly in North America and parts of Europe. Global companies’ performance in recent results and commentary on 2019/20 outlook Companies Revenue

(USD bn) Performance (H1 2019/ Q2 2019)

Outlook/Guidance (H1 2019/ Q2 2019)

Outlook for H2 2019/2020

Fertiliser

Nutrien (Canada)

19.6

• Bad weather in the US affected planting and demand for crop inputs in H1 CY19, mainly in Q2. Nutrien lowered its second‐half guidance on falling prices of products such as DAP and potash.

• It expects US crop nutrient demand to remain marginally below the 10‐year average due to weaker demand in the US. A sharp recovery is likely in 2020 led by better acreage (corn) in the US, better demand in Latin America, India, and other Asian countries.

Yara International

(Norway)

12.9

• Yara reported better performance in H1 CY19 driven by higher volumes (ammonia, urea, nitrates and SSP) and margins (low gas prices). Brazil and Africa supported volumes while Asia and Europe volumes were flat.

• Expects near‐term outlook to be positive for nitrogen fertilisers (urea), as global supply‐demand balance will tighten led by closure of Chinese capacity. Expects demand for nitrogen products to rise gradually with increasing crop production. Will cover demand and supply constraint from China.

Mosaic Co. (USA)

9.5

• Mosaic’s performance was negatively impacted in Q2 CY2019 led by lower sales volumes and margins. Wet weather in the US and falling product prices affected performance.

• It expects subdued planting in the US to lead to sustained elevated crop prices, which is likely to improve farmers’ ability to afford crop nutrients in H2 CY19. Latin America (Brazil) will continue support growth but erratic weather in India/China could reduce demand of potash and phosphate in the second half of 2019.

CF Industries (USA)

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• Strong performance in H1 2019 supported by higher realisation for nitrogen‐based fertilisers. Margins were also higher led by lower raw material costs (gas prices).

• CF expects near‐term demand to remain strong in North America, led

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by recovery in crop prices supporting growers with higher margins. Over the medium term, it sees nitrogen (urea/ammonia) demand remaining higher than supply due to China’s capacity shutdown. Demand for urea in India and Brazil could remain stronger over the next two years.

Agrochemicals

Bayer (Germany)

13.2

• Crop protection business (herbicides and fungicides) in Q2 CY19 was hurt by flooding/heavy rains in the US and drought in major parts of Europe and Canada. Better growth in Latin America could not offset negative growth in North America. Europe/Middle East/Africa/Asia reported flat growth.

• Bayer expects slow economic growth in 2019 compared to 2018. Seed and crop protection segments are expected to see flat growth in 2019 due to limited planting areas in the US, ongoing trade war, and outbreak of African swine fever in China.

Syngenta* (Switzerland)

9.9

• Syngenta (part of Chemchina) had muted performance in H1 CY19 due to weaker demand for crop‐protection products. Historic flooding in the US and severe droughts in Australia and Indonesia affected the performance. Also, trade tension restricted opportunities for the US farmers for exports (soybean).

• Syngenta expects low single‐digit growth in the second half of 2019, supported by better growth in Latin America.

BASF (Germany)

7.2

• BASF’s lacklustre performance has cast uncertainty on its chemicals and materials segments due to slow auto demand and the ongoing trade war. Agriculture solutions segment performed better in the first half of 2019, led by acquisition of assets from Bayer and product price increases.

• However, BASF is expecting a dull outlook for the second half of 2019 by reducing its guidance from a “slight increase” earlier to a “slight decline” now. BASF guided for “considerable decline” in margins (EBIT) from “slight increase” earlier on poor planting in the US, slower auto demand, and ongoing trade war affecting 2019 growth.

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• FMC posted better performance compared to peers in Q2 CY19 primarily led by Latin America (Brazil), Europe (Ukraine/Russia), and Africa and Middle East regions. Better revenue growth was supported by new product launches and product mix. North America and Asia (India) had subdued growth led by erratic weather.

• FMC maintained its guidance (mid to high single digit growth) for 2019 led by continuous growth across the portfolio and regions except North America.

Source: PhillipCapital India Research, Monthly prices

FERTILISER

Government reforms and balanced nutrient usage are game changers


FERTILISER SECTOR UPDATE

The fertiliser sector Overview • Global market value: c.US$155bn in 2016.China US$ 57bn (c.37%) and India’s

US$27bn (c.15%) • Fertiliser consumption is largely influenced by evolution of planted area, yield,

cropping pattern, crop prices, government subsidy, nutrient management regulation, and innovation.

• In primary nutrients – nitrogen, phosphate, and potash – major products are urea, DAP, and MOP respectively. These have large market share and are widely traded and consumed globally.

• In terms of usage by crops, grains are the largest consumers of fertilisers, followed by fruits and vegetables.

Globally, the nitrogen market is highly fragmented; phosphate and potash are concentrated • Nitrogen: The global nitrogen supply is highly fragmented due to easy and wide

availability of key raw materials such as coal and natural gas. Top‐3 producers (Qafco, Safco, IFFCO) have only c.11% world capacity.

• Phosphate: The global phosphate market is more concentrated and top‐3 producers (some of the major producers are in China, Middle East, Africa, and India including Nutrien, Mosaic, and Jordan) hold one‐fourth share.

• Potash: The market is highly concentrated with top‐3 producers holding c.50% capacity (Nutrien, BPC, and Uralkali).

World nutrient consumption share by products Urea is a leading grade in nitrogen fertiliser consumption

Source: IFA, Industry, Phillip Capital India Research

Ammonia, 4%

AS, 3%

Urea, 48%

AN/CAN, 9%

UAN, 5%

Amm. Phos, 7%NPK, 18%

Others, 5%

Nitrogen (N) 107 mn tonnes

Urea dominates with half of the nitrogen fertiliser consumption



Grades with nitrogen (mainly DAP/MAP) lead the share in phosphate

Source: IFA, Industry, Phillip Capital India Research

MOP is the leading product in the potassium market

Source: IFA, Industry, Phillip Capital India Research China is the undisputed leader in all nutrient consumption • The global market is dominated by China in all three nutrients at 25‐28%. • India is the second largest country in consuming nitrogen and phosphate and the

fourth largest in potash. • Consumption growth is expected to remain higher for phosphate and potash in

coming years with changes in balanced usage, more fruits and vegetable production, more protein‐rich diet, and higher meat consumption in developing countries.

Top fertiliser‐consuming markets: China, India, Brazil, US

Source: IFA, PhillipCapital India Research

Phos rock (Direct App), 2%SSP, 8%

TSP, 6%Others , 9%

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Phosphate (P) 45 mn tonne

MOP, 56%

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Nitrogen Phosphate Potash



Indian fertilizer dynamics Urea consumption dominates, but P and K are growing faster • Total consumption was 56mn tonnes (in product or physical weight) in FY19. • Indian fertiliser consumption is dominated by urea with a share of c.54% or

30.5mn tonnes in FY19. Other major products are DAP and NP/NPK/NPS with c.33% share or c.8.5mn tonnes each, SSP (Single Super Phosphate) with 6% share (at c.4mn tonnes) and direct application of potash (MOP) with a c.6% share or (c.4mn tonnes).

• Presently, there are 31 urea plants, 19 DAP and NP/NPS/NPK grade producers, and c.110 SSP plants in India.

Non‐urea consumption is growing faster in recent years in India Products FY19

(mn tonnes product) 10‐year CAGR

5‐year CAGR

3‐yearCAGR

Comments

Urea 31 1.4% ‐0.1% ‐0.8% Stable growth due to curb on illegal usage, neem coating, and introduction of 45kg bags.

DAP 9 2.2% 0.3% 6.8% Growing consumption in recent years with crop diversification and balancednutrient usage.

Complex* 9 2.3% 1.9% 1.4% Growing with DAP consumption. SSP 3 4.2% ‐3.1% ‐4.8% SSP is called the poor farmer’s DAP. It has seen a slowdown over the past five years,

mainly due to poor quality of products. MOP 3 0.9% 7.4% 3.4% Growth in cash crops cultivation and balanced nutrient usage is supporting potash

consumption. TOTAL 56 1.8% 0.5% 0.7% Overall consumption is increasing gradually with growing crop production and

yield.

Source: Industry, PhillipCapital India Research,*NP/NPK/NPS/AS Product‐wise raw material sourcing/usage Products Demand Domestic

production Imports Raw‐materials requirement

Phosphoric acid Phosphate rock Ammonia Sulphur Sulphuric acid Urea 30 24 6 Ammonia is produced from domestic gas and imported RLNG DAP 9 5 4 55% of demand

is imported 85‐90% of demand

is imported Demand is met

largely from importsSulphur and sulphuric acid demand is largely imported. Some SSP and complex producers

use domestically produced sulphur(from refineries) and sulphuric acid (copper smelter)

Complex* 9 9 0.5 SSP 3 4 Na

MOP 3 NA 4 Entire requirement is imported TOTAL 55 41 15 80% of phosphate requirement is met through imports via finished products of raw material.

100% potash requirement is met from imports. 20% of urea requirement is met from imports.

Source: Industry, PhillipCapital India Research ,*NP/NPK/NPS/AS, in FY18 Subsidy plays an important role in Indian market Farmers’ incomes and affordability plays an important role for the growth of fertiliser consumption. The government started supporting farmers since 1977 (as global oil prices had increased substantially by then) with a fertiliser subsidy of Rs 0.6bn, so that they could procure them at reasonable prices. Since then, the government has controlled the entire sector with a fixed MRP and reimbursement of costs until 2010 after which non‐urea products were partially decontrolled. There was no new addition in urea capacity for more than a decade due to unfavourable policies. The demand‐supply gap created an import requirement of 6‐8mn tonnes. However, the Indian fertiliser market is gradually set to change in coming years, with various government initiatives.



Some of the reform‐oriented initiatives by the government in recent years are Recent changes in the sector

Description Our view

Direct Benefit Transfer* Click here

DBT is aimed at directly transferring subsidy to farmers’ accounts so that companies are free from the subsidy regime and can focus on efficiency

We expect this will take some time, as the current form of DBT (subsidy receivable by companies only on PoS machine sale) is still stabilising. The government is likely to start with pilot projects of directly transferring subsidy to farmers’ bank accounts in coming months (similar to phase‐1, when PoS machines were implemented). Once subsidy is given directly to farmers, companies will be free from the subsidy regime.

‘Neem’ coating of urea Producers have to compulsory produce ‘neem’ coated urea

‘Neem’ coating of urea and introduction of 45‐kg bags is likely to reduce illegal transfer into chemicals industries and reduce some consumption (real impact should be visible after 1‐2 years based on consumption trend). 45‐kg bag for urea Urea bag size reduced to 45kg from 50kg

Free exports Products are placed under “free” category from “restricted”

We believe government’s decision to allow exports is a long‐term vision because India is still a net import of fertiliser. However, we expect this will benefit non‐urea companies who can now sell excess availability in neighbouring countries.

New investment policy for urea

Aiming to fill the demand‐supply gap in India with revenue and cost both linked to USD

We expect India will cover the demand‐supply gap in 2‐3 years with the addition of new plants such as Chambal, Matix Fertilisers, and 5 revival projects

GST Uniform tax rate across the country Urea MRP remains uniform across the country (Rs 266 per 45‐kg bag) making it easy for farmers to procure it.

Source: Phillip Capital India Research,*we have covered DBT in the greater details in our annual ground view The problem of subsidies will abate We believe India’s fertiliser subsidies problem will lessen in coming years, with the implementation of DBT, as the government is aiming to pay subsidies to companies within a week. According to our channel checks, companies have already started receiving subsidies within 2‐4 weeks for the invoices generated till the government has budget‐allocated funds (available after paying previous outstanding). We expect that the government will consider paying the previous outstanding soon (Rs 300‐350bn) to resolve long‐term subsidy issues with companies. Once the outstanding subsidy is cleared, companies’ working capital cycles should reduce drastically – to about one month from 3‐4 months presently. Government’s carryover subsidies (liabilities) remained stable in the past three years

Source: DoF, Phillip Capital India Research Current regulations for the sector The Indian fertiliser sector is broadly regulated under three policies for urea and non‐urea products. Urea is completely regulated by the government (MRP is fixed and subsidy is flexible) and in non‐urea, MRP is flexible (charged by companies to farmers based on margin/cost) and subsidy is fixed.

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200

400

600

800

1,000

1,200

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Rs bn

Fertiliser subsidyNon‐urea Urea Carry over

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_Annual_Jan_2019_20190201013136.pdf�



Details for urea and non‐urea products Urea Non‐UreaSubsidy Flexible – based on cost (mainly gas prices) Fixed (for a 50‐kg bag) – announced towards

the end of a financial year MRPs Fixed (Rs 266 per 45‐kg bag) Flexible (for a 50‐kg bag) –varies by company Policy Existing 25 plants are regulated under New

Urea Policy 2015 New plants (greenfield/brownfield) – New Investment Policy

Regulated under NBS (Nutrient Based Subsidy) Policy 2010

Number of products

Single (Urea) 21 grades(in FY19) – DAP and other complex grades including MOP and SSP

Source: DoF, Industry, PhillipCapital India Research Urea policies New Urea Policy 2015 (focused on energy efficiency) • Introduced for existing (25) plants by grouping each unit based on energy

efficiency of urea production (energy consume per tonne of urea production). • The three naphtha‐based units (Mangalore Chemicals & Fertiliser, Madras

Fertiliser, and SPIC) kept out of the new policy regulation until gas pipelines are connected.

• The 25 units are paid a fixed cost (including return on investment, interest, and depreciation) and variable cost (mainly gas cost based on pooled gas prices) based on government‐defined parameters.

• The units have the flexibility to increase margins by saving energy consumption (lower energy consumption compared to set norms). Yara Fertiliser (earlier a Tata Chemical’s urea plant) is the most efficient among the 25 units.

• Most of the urea units are in the process of upgrading their plants to improve energy consumption along with increasing minor capacity.

• These urea plants – Chambal (Gadepan), IFFCO (Aonla/Kalol), Grasim (IndoGulf), Yara Fertiliser (Babrala), and RCF (Thal) – have already achieved defined energy norms and have saving of 3‐8%.

• Among listed urea companies, we believe Chambal will benefit the most considering better energy consumption to produce urea.

c.50% of urea units have energy consumption below 5.5 Gcal/tonne

Source: DoF, Phillip Capital India Research

4.50

5.00

5.50

6.00

6.50

7.00

Vijaipur‐I

Vijaipur‐II

Aonla‐I

Aonla‐II

Phulpu

r‐II

Hazira

Gadep

an‐I

Gadep

an‐II

Jagdish

pur

Shahjahanp

ur

Kakinada

‐I

Kakinada

‐II

Babrala

Thal

Kalol

Bharuch

Vado

dara

Bathinda

Nangal

Panipat

Phulpu

r‐I

Kota

Kanp

ur

Trom

bay

Goa

NFL IFFCO KRIBHCO CFCL GrasimKSFL NFCL Yara RCF IFFCOGNFCGSFC NFL IFFCO SFC KFCL RCF Zuari

Gca/ton

ne

Urea plant‐wise energy norms in FY19



The New Investment Policy (focus on self‐sufficiency) • NIP was implemented for new projects/plants (greenfield – 5 revival project of

the government and Matix Fertiliser; brownfield – Chambal Fertiliser) to encourage investment in a sector that had not seen any fresh investment for more than a decade.

• Government aims to cover the current demand‐supply gap of 6‐8mn tonnes (import) by 2022‐23.

• The policy provides assured margins with revenue and cost linked to USD. • We believe upcoming projects, especially by Chambal Fertiliser, will generate a

minimum ROE of 12% and this policy is far better than the old policy.

Nutrient Based Subsidy (NBS) Policy to encourage balance nutrient usage The objective of the NBS policy was to start partially decontrolling fertiliser prices and gradually freeing companies from subsidies reimbursement. However, the government kept urea out of the NBS policy, resulting in a strong spike in non‐urea prices (the spread between urea and DAP prices is currently almost 5x) led by decontrol and price increases in raw materials/finished products. The major highlights of the policy: • Government declared fixed subsidy amount for each grade and companies were

free to charge MRPs at ‘reasonable’ levels to farmers. • Companies were able to recover c.70% of realisation from MRPs and the rest

from subsidies. This made non‐urea players (such as Coromandel International) much better placed.

• Presently, 21 grades are covered under NBS Policy 2018‐19 – DAP, MOP, and other NP/NPK/NPS).

In FY19, companies increased DAP MRPs by c.Rs 29,000 per tonne to maintain margins after a sharp depreciation of rupee and rise in import prices of raw materials. These have now declined to Rs 25,000‐27,000 per tonne and some companies are also offering discounts on MRPs in the range of Rs 1,000‐1,500 per tonne. MRPs have risen with a rise in raw material costs over the past two years

Source: Industry, Phillip Capital India Research,*avg MRP/subsidy (Rs per tonne)

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5,000

10,000

15,000

20,000

25,000

30,000


DAP(Subsidy) MOP(Subsidy) DAP(MRP) MOP(MRP)



Rising import prices and INR deprecation resulted in high MRPs in recent years

Source: Industry, Phillip Capital Research, Avg prices, *up to early Jan2019 After the NBS policy, MRP gap between urea and non‐urea has risen to 3‐5x

Source: Industry, PhillipCapital India Research, in times

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15

30

45

60

75

‐

150

300

450

600

750

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19*

USD

/INR

USD

/ton

nes

DAP Urea MOP USD/INR

‐

1.0

2.0

3.0

4.0

5.0

6.0

FY00

FY05

FY10

Aug‐10

Jan‐11

Jun‐11

Nov

‐11

Apr‐12

Sep‐12

Feb‐13

Jul‐1

3De

c‐13

May‐14

Oct‐14

Mar‐15

Aug‐15

Jan‐16

Jun‐16

Nov

‐16

Apr‐17

Sep‐17

Feb‐18

Jul‐1

8De

c‐18

May‐19

Ratio of urea MRP vs DAP and MOP DAP MOP



Investment rational for fertilisers Direct Benefit Transfer (DBT) in its true sense will be a game changer DBT implementation in the true sense – where subsidy is directly credited to farmers’ bank accounts – will be a key game changer for the fertiliser sector. DBT (current form) was implemented in 2018. Under this, PoS (point of sale) machines were installed at every retailer (about 224,000) in India and products are sold via PoS devices only. Government had assured manufacturers that subsidy will be paid to them within a week (vs. 3‐4 months delay earlier). The flowcharts below indicate the change in the subsidy flow for companies under the current form of DBT. Companies now receive subsidy only after actual sales. In the earlier system, they could claim 90‐95% subsidy as soon as material reached state districts. Subsidy distribution before and after DBT

Source: Industry, PhillipCapital India Research When will ‘true’ DBT roll out? • DBT, in its current format, will take four to six months to stabilise. • Only after this will the government will move towards next phase of transferring

subsidy to farmers. • In July 2019, the government took a new initiative (DBT 2.0) in order to address

various concerns such as shortages of PoS machines, networking issues in remote areas, and software problems. The initiative includes: 1. DBT Dashboard to facilitate accurate information on requirement, supply,

and availability at national, state, and district levels. 2. PoS 3.0 software– an upgraded software – with provision of area‐ and crop‐

specific recommendations based on soil‐health card and buyers details. 3. Desktop PoS Version to support retailers with computer and laptops in

order to speed up sales in the peak season. • Niti Aayog is likely to start with pilot projects in some districts by transferring

subsidy directly to farmers’ bank accounts. • The government is likely to leverage DBT (in its true sense) in the coming years to

pass on other welfare benefits such farm loans, MSP, crop insurance, and recommendations of agriculture inputs usages. This would bring transparency



and traceability so that farmers’ incomes improve gradually. This would also support fertiliser usage.

Subsidy receivables days have declined over the past two years

Source: Companies, PhillipCapital India Research,*for major companies New investment policy will fill the demand‐supply gap for urea India remains a net importer of urea since FY05, with no new addition of capacity due to unfavourable government policies. In fact, India is the largest importer in the world (c.17% of trade) for urea, creating a high dependency on the global market, which often forces the government to procure at higher prices (ironically, India’s large volume demand raises international prices). The government announced a new investment policy in 2012 (modified in 2013) to create additional supply by providing a fixed realisation of US$285‐310 per tonne (floor/ceiling with respect to import parity price) at a gas price of US$6.5/mmbtu. Any increase in gas by US$0.1/mmbtu will lead to increased floor and ceiling realisation by US$2 per tonne, up to a gas price of US$14/mmbtu – after which plants are paid a floor price. Urea demand‐ supply gap to reduce a lot in coming years with 7 units added

Source: Industry, Phillip Capital India Research As per industry experts, the new investment policy for urea (for brownfield and greenfield) provides minimum ROE of c.12% at the base price (limiting downside risk) and maximum ROE of c.18% at the floor price, based on import‐parity realisation.

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1

2

3

4

5

6

FY13 FY14 FY15 FY16 FY17 FY18

in m

onths

Urea NP/NPK/NPS

‐4

‐2

0

2

4

6

8

FY91

FY93

FY95

FY97

FY99

FY01

FY03

FY05

FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY21e

FY23e

mn tonn

es



A gradual shift towards balance usage will support non‐urea grades • Nitrogen‐based fertilisers (mainly urea, with a share of c.55% in FY19) are low

MRP compared to non‐urea grades, as urea is 100% controlled by government policies. Nitrogen consumption has remained stagnant since FY11 and consumption of phosphate and potassium was volatile due to inventories, higher MRPs, and higher raw material prices.

• Government has implemented neem‐coating of urea and made it compulsory to sell urea in 45kg bags (from 50kg earlier) to reduce consumption. We expect this measure to gradually reduce urea consumption mainly because: (1) Neem coating ensures gradual release of urea, resulting in higher yields and lower underground water contamination due to urea leaching. (2) Neem serves as a natural insecticide.(3) Neem‐coating helps to reduce illegal usage by chemicals industries.(4) Bag sizes have been reduced by 10% – to 45kg from 50kg. Since farmers purchase by bag, and do not really look at the kilos, they don’t go and buy more urea because of the smaller bag sizes. Farmers are expected to gradually move towards balanced usage by applying complex grades in order to improve crop yields/crop production.

• A gradual shift towards more cash crops, pulses and cereals should encourage better consumption of P and K grades.

Nitrogen fertilisers (urea) continue to dominate consumption

Source: DoF, Industry, Phillip Capital India Research JVs for securing raw materials will lead to uninterrupted supply Large DAP and complex grade producing companies such as IFFCO and Coromandel International have set up joint ventures for assured supply of raw materials, especially phosphoric acid, which is the principal raw material for complex fertilisers. GSFC has signed an MoU with Centrex Metals, Australia (c.0.3 mn tonnes phosphate rock for 10 years) for its Sikka unit expansion (backward integration by setting up phosphoric acid plant). Phosphoric acid and urea sourcing tie‐ups with global suppliers Companies/JVs Companies Countries Product CapacityFoskor Coromandel (14% stake in Foskor) South Africa Phos acid 0.75ICS Senegal IFFCO Senegal Phos acid 0.66Indo Maroc Phosphore (IMACID)

Chambal, Tata Chem, OCP (Morocco)

Morocco Phos acid 0.43

TIFERT GSFC, Coromandel, GCT (Tunisia) Tunisia Phos acid 0.36JIFCO IFFCO,JPMC (Jordan) Jordan Phos acid 0.48OMIFCO IFFCO, Kribhco, Oman Oil Oman Urea 1.65Planned/Proposed for urea JV RCF, GSFC, Iranian companies Chabahar, Iran Urea 1.27JV NFL, GSFC, RCF, NMDC Algeria DAP/Phos acid 1.00JV RCF, Olam (Gabon) Gabon Urea 1.27

Source: DoF, companies, Industry, PhillipCapital India Research

0

2

4

6

8

10

12

14

16

18

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

mn tonn

e

N P K

Nitrogen (N) consumption dominates but Phosphate (P) and Potassium (K) are gradually catching up



Government – OMIFCO JV is very successful • The government is already procuring close to 2mn tonnes of urea from the

OMIFCO joint venture under which urea is supplied at a gas cost of c.US$ 2 per mmbtu.

• The government is saving substantially in terms of production cost vs. domestically produced urea – at a gas cost of c.US$10‐12 per mmbtu – pooled price and imported urea.

• The Indian government is looking at similar JVs with Iran, Algeria, and Gabon. For potash (MOP), India is entirely dependent on imports. Some companies such as Indian Potash and Coromandel have long‐term MOUs for assured supply.

Government support for agriculture will drive consumption Farmers’ distress over the past few years on over production, crop losses, and lower realisations has forced the government to take steps. Some of the initiatives include investment in irrigation, crop insurance schemes, electronic market, soil health cards, direct transfer of subsidies, and higher allocation for credit facilities. The recent announcements of PM‐KISAN to provide income support of Rs 6,000 per year to all farmers will strengthen their purchasing power for agriculture inputs. North and south India farmers are major consumer of agri inputs

Source: Ministry of agriculture, Industry, Phillip Capital India Research, *Demand share by volumes Government’s schemes to boost agri inputs demand Major government initiatives Expected impact Crop insurance schemes Benefits farmers by securing the risk of crop losses.

Improves confidence for more sowing areas. Focus on irrigation and micro irrigation Helps farmers plant multiple crops.

Reduces dependency on rainfall. Soil health cards Will allow the government to provide better advice to

farmers about balanced usage of agri inputs. Higher penetration needed.

Agriculture credit Funding towards agriculture has increased substantially, specifically over the past three years.

Trading platform (e‐NAM) Linking of mandis across the country will allow farmers to sell produce at better prices. Government aims to link 22,000 mandis by 2022 from current 585.


0%

5%

10%

15%

20%

25%

30%

35%

40%

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5

10

15

20

25

30

UP

Bihar

Maharashtra MP AP

Kerala TN

Karnataka

W Ben

gal

Telangana

Others

Fert/Agche

m dem

and share

Nos of farmers in m

n

Nos of farmers Fert demand share* Crop protection demand share*



Non‐urea companies are better placed compared to urea • DAP and other complex‐grades manufacturing companies are better placed, as

their subsidy receivables are 25‐30% of sales compared to c.70% for urea companies.

• Those who initially produced urea have diversified into areas such as industrial chemicals in order to generate better margins.

• GSFC, GNFC, Coromandel, and Deepak Fertiliser are generating revenues from various products such as caprolactum, toluene di‐isocynate (tdi), melamine, technical ammonium nitrates, and agro chemicals.

Many companies have diversified into non fertilisers for better margins

Source: Phillip Capital India Research, *Includes trading of fertiliser, Industrial chemicals Key crops/nutrients driving fertiliser demand Consumption by crops In 2014‐15, out of the world’s total fertiliser consumption (source: study by an international fertiliser association): • Cereals (wheat, rice, etc.): c.50% or 90mn tonnes. • Oilseeds (soybean, etc.):c.13% • Fruits: 7%. • Vegetables: 9% • Fibre, sugar, roots/tubers (potato, yarn, etc.):16% • Grassland and rest (rubber, coffee, tea, tobacco, cocoa, etc.): 12%. Globally, wheat, rice, corn and cereals covers about 50% of fertiliser demand

Source: IFA, Industry, PhillipCapital India Research

0%

20%

40%

60%

80%

100%Non‐Fertiliser* Fertiliser

4%

6%

8%

10%

12%

14%

16%

18%

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5

10

15

20

25

30

35

40

~50% ~13% ~16%

Coromandel and Deepak Fertiliser are better placed among others in terms of business areas with no presence in urea business, so their exposure to subsidy receivables is limited

Globally, the fertiliser consumption pattern is determined by crop mix, cropping pattern, government policies, and national interest.



Largest crop‐wise contribution in top five consuming countries/regions: • India: Rice, c.30% • China: Fruits and vegetables, c.40% • USA: Maize, c.50% • Brazil: Maize (c.15%) and soybean (c.40%) • Europe: Wheat (c.25%) and maize (c.15%). Crop‐wise contribution beyond top five consuming countries/regions Generally, a large share of fertiliser nutrients consumption is dominated by 1‐2 crops only. The consumption of fertilisers largely depends on of soil quality, weather pattern, traditional cropping patterns, fertiliser usage pattern, government policies, and eating habits of local populations. The regional variations in terms of crop pattern are visible in countries such as Malaysia and Indonesia, which have higher share of fertiliser usage in palm oil, compared with Bangladesh, who uses it largely for rice. • Malaysia: Palm oil, c.85% • Indonesia: Palm oil, c.40% • Bangladesh: Rice, c.70% Globally, wheat, rice and corn are major consuming crops in terms of fertiliser usage

Source: IFA, Phillip Capital India Research, share of consumption in brackets India’s fertilisers are largely used for wheat and rice crops (c.50% of total) followed by oilseeds and fibre • Nitrogen (N)‐based fertilisers (mainly urea) are largely used for wheat, rice,

oilseeds, and fibre cultivation, which have a c.70%share in total N‐based fertiliser usage in India. Globally, N‐based fertilisers are used for rice, wheat, maize, soybean, and fruits/vegetables cultivation (these crops have a c.70% share of total global N‐based consumption).

• Like nitrogen fertiliser usage, phosphate (P)‐based fertilisers (mainly DAP and 20.20.0.13) are used for wheat, rice, maize, and soybean in India. These crops account for c.60% of total P‐based fertiliser consumption in the country.

• Similarly, potassium‐based fertiliser (mainly MOP) is largely used in rice, wheat, maize, soybean, and fruits/vegetables (these crops have a 60% share in India’s potassium fertiliser consumption). Globally, potassium based fertiliser consumption is largely in maize, soybean, fruits/vegetables, and palm oil (c.55% of global consumption is by these crops).

c.15%

c.20%

c.25%

c.15%

c.15%

c.30%

c.15%

c.15%

c.45%

c.40%

c.20%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

World

China

India

USA

EU

Brazil

Fertiliser consumption in top 5 markets WheatRiceMaizeOther cerealsSoybeanPalm oilOther oilseedsFibreSugarRoots&TubersFruitsVegetablesGrasslandResidual



Rice and wheat are major crops in India vs. rice, wheat and corn globally

Source: IFA, PhillipCapital India Research

0%2%4%6%8%10%12%14%16%18%20%

0%

20%

40%

60%

80%

100%

World

India

K2O (IND) P2O5 (IND) N (IND) N (WRD) P2O5 (WRD) K2O (WRD)



Comparative analysis of companies Players with P&K focus and diversified business have seen better growth • Coromandel and GSFC have seen largely double‐digit revenue growth over the

past decade due to a non‐urea product portfolio, larger market presence, and diversification into non‐fertiliser segments.

• Companies with large dependency on urea revenue (Rashtriya Chemicals & Fertilisers/Nagarjuna Fertilisers) have seen single‐digit revenue growth in the past decade due to higher share of receivables for government subsidies.

• Southern Petrochemicals Industries Corp (SPIC), Mangalore Chemicals & Fertilisers (MCFL), and Madras Fertilisers (MFL) are using naphtha as feedstock for producing urea, so their cost of production is higher, resulting in higher receivables of subsidies and more energy consumption.

• Globally, companies have been struggling to grow over the past decade with increasing competition leading to lower realisations. However, revenue growth has been better over the past three years with increasing realisations and recovery in global demand.

CRIN, GSFC and Deepak Fertilisers outpaced industry revenue growth Companies Revenue

Rs bn (FY19)

*Fertiliser revenue share %

Revenue CAGR 10yr 5yr 3yr 1yr

Coromandel International 132 80% 20% 13% 5% 21%National Fertiliser (NFL) 122 97% 9% 9% 16% 37%Chambal Fertilisers 102 95% 6% 3% 4% 35%Rashtriya Chemicals & Fertilisers (RCF) 89 95% 1% 6% 3% 22%Gujarat State Fertiliser & Chemicals (GSFC) 85 70% 4% 12% 12% 36%Zuari Agro 81 100% Na 2% 2% 12%Deepak Fertilisers 67 33% 16% 12% 16% 12%Gujarat Narmada Valley Fertilisers & Chemicals (GNFC) 59 34% 7% 4% 9% 1%Mangalore Chemicals & Fertilisers (MCFL) 31 100% 2% ‐1% 1% 14%Southern Petro (SPIC) 26 99% 4% 10% 10% 31%Fertiliser and Chemicals Travancore (FACT) 19 98% 12% ‐3% 5% NaNagarjuna Fertilisers 19 100% Na ‐11% ‐21% ‐51%Madras Fertilisers (MFL) 16 100% 4% ‐9% 10% ‐1%

Source: Bloomberg, PhillipCapital India Research,*Approx. share of FY18/19 for trading and manufacturing of

urea/non‐urea Global players have delivered muted revenue growth Companies Revenue

(US$bn) Country Revenue CAGR

10y 5yr 3yr 1yr (yoy)Nutrien 19.6 Canada Na Na Na 7.6%Yara International 12.9 Norway ‐2.0% ‐2.2% ‐1.2% 13.8%Mosaic 9.6 USA ‐0.2% 1.2% 2.5% 29.4%Israel Chemicals 5.6 Israel ‐2.1% ‐2.4% 0.9% 2.5%K+S AG 4.8 Germany ‐3.8% ‐1.9% 1.0% 16.4%CF Industries Holdings 4.4 USA 1.2% ‐4.2% 0.9% 7.2%PhosAgro PJSC 3.7 Russia 0.0% 2.6% 6.0% 20.1%Uralkali PJSC 2.8 Russia 0.8% ‐3.7% ‐4.1% ‐0.3%Qinghai Salt Lake Industry 2.6 China 16.4% 15.9% 17.0% 57.6%Acron PJSC 1.7 Russia ‐0.1% ‐4.1% 4.4% 6.8%China BlueChemical 1.7 China 5.7% ‐0.5% 0.1% 17.3%Industries Qatar 1.6 Qatar ‐9.0% ‐0.2% 3.3% 25.8%Jordan Phosphate Mines 1.0 Jordan ‐2.3% 3.2% ‐3.5% 14.8%Fauji Fertiliser 0.9 Pakistan 1.0% 3.9% 2.1% 1.9%Arab Potash 0.7 Jordan ‐3.2% ‐1.6% ‐2.9% 13.9%CVR Partners 0.4 USA 2.9% 1.6% 6.7% 6.1%Intrepid Potash 0.2 USA ‐6.7% ‐9.1% ‐10.2% 17.1%

Source: Bloomberg, PhillipCapital India Research



Non‐urea producers and traders enjoy better margins • Diversified companies (non‐fertiliser) such as Coromandel, GNFC, GSFC, and

Deepak Fertilisers have better margins with portfolios covering various segments such as agrochemicals, industrial chemicals, and retail. Chambal has gradually improved its margins over the past five years by discontinuing non‐core businesses and better non‐urea trading exposure.

• Public sector urea companies such as RCF, NFL, MFL, and FACT still struggle to improve margins, mainly due to operational inefficiency and competition from co‐operative and private companies.

• Globally, fertiliser companies have better operating margins than Indian ones, due to backward‐integration and global presence.

• Larger integrated companies such as Nutrien, Mosaic, and Yara’s margins have declined over the past five years – to 14% from an average 20% – with rising cost of production and limited revenue growth. Russian companies such as Uralkali, PhosAgro, and Acron always enjoyed higher operating margins of about 35‐40% due to backward integration (captive potash and phosphate rock mines).

Leaders such as CRIN and CHMB enjoy better margins Companies EBITDA margins

FY15 FY16 FY17 FY18 FY19Gujarat Narmada Valley Fertilisers & Chemicals (GNFC) 7.9% 12.4% 14.2% 23.8% 14.7%Coromandel International 8.6% 8.5% 10.8% 11.7% 10.9%Chambal Fertilizers 7.5% 8.4% 10.3% 10.6% 12.1%Gujarat State Fertiliser & Chemicals (GSFC) 12.3% 11.9% 10.4% 10.2% 8.8%Deepak Fertilisers 8.7% 8.8% 11.4% 9.1% 6.8%Zuari Agro 4.0% 7.7% 12.3% 11.8% 3.9%Mangalore Chemicals & Fertilisers (MCFL) 6.9% 5.6% 6.1% 8.9% 6.1%National Fertiliser (NFL) 6.7% 7.2% 7.3% 5.6% 6.7%Rashtriya Chemicals & Fertilizers (RCF) 10.5% 5.8% 5.9% 3.7% 5.0%Southern Petrochemicals Industries Corp (SPIC) 3.9% 2.9% 3.6% 6.8% 3.8%Nagarjuna Fertilizer Na 6.9% 6.5% 8.3% ‐7.1%Madras Fertilizers (MFL) ‐2.1% ‐0.2% 4.5% 0.3% ‐1.5%Fertiliser and Chemicals Travancore (FACT) ‐8.3% ‐11.9% 2.4% 8.6% Na

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research Margins for global companies are better mainly due to integrated operations Companies Countries Revenue

(US$bn) EBITDA Margin

CY2014 CY2015 CY2016 CY2017 CY2018Nutrien Canada 19.6 Na Na Na Na 10%Yara International Norway 12.9 16% 19% 16% 10% 9%Mosaic Co USA 9.6 23% 23% 14% 15% 19%Israel Chemicals Israel 5.6 19% 22% 8% 19% 35%K+S AG Germany 4.8 24% 24% 18% 18% 14%CF Industries Holdings USA 4.4 57% 40% 26% 27% 37%PhosAgro PJSC Russia 3.7 31% 43% 39% 28% 32%Uralkali PJSC Russia 2.8 49% 62% 52% 49% 53%Qinghai Salt Lake Industry China 2.6 28% 25% 23% ‐7% 12%China BlueChemical China 1.7 25% 21% 10% 22% 26%Acron PJSC Russia 1.7 27% 43% 33% 31% 32%Industries Qatar Qatar 1.6 23% 21% 24% 15% 16%Jordan Phosphate Mines Jordan 1.0 11% 11% ‐2% ‐1% 11%Fauji Fertilizer Pakistan 0.9 34% 30% 17% 12% 19%Arab Potash Jordan 0.7 28% 40% 19% 30% 36%CVR Partners USA 0.4 37% 34% 24% 20% 23%Intrepid Potash USA 0.2 23% ‐98% ‐7% 11% 23%

Source: Bloomberg, PhillipCapital India Research, margins for CY.

Globally, miners of MOP and integrated fertiliser companies are better placed



Working capital days – Non‐urea players have better working capital cycles • A core concern for the fertiliser sector is delays in receiving subsidies from the

government. Urea companies such as RCF, NFL, and Nagarjuna Fertilisers have receivable days piled as high as to 6 months, because subsidy contributes to a larger share of their realisations.

• Non‐urea fertiliser companies with presence in other business segments, such as Coromandel, Deepak Fert, GSFC, and GNFC, have better working capital days (1‐2 months).

• Government initiatives to transfer subsidy directly to farmers (DBT) is expected to reduce receivables days in the coming years.

Receivables days Companies FY15 FY16 FY17 FY18 FY19Coromandel International 42 52 59 52 50Gujarat Narmada Valley Fertilisers & Chemicals (GNFC) 67 107 96 69 73Mangalore Chemicals & Fertilisers (MCFL) 29 44 127 165 163Deepak Fertilisers 79 101 119 99 91Chambal Fertilisers 119 156 147 123 173Nagarjuna Fertiliser 173 140 172 134 238Gujarat State Fertiliser & Chemicals (GSFC) 128 151 200 156 110Rashtriya Chemicals & Fertilizers (RCF) 141 169 201 165 154Zuari Agro 168 177 215 173 162National Fertiliser (NFL) 215 230 217 167 165

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research Payable days Companies FY15 FY16 FY17 FY18 FY19Nagarjuna Fertiliser 137 130 151 124 250Coromandel International 117 117 121 133 112Mangalore Chemicals & Fertilisers (MCFL) 56 70 75 67 64Zuari Agro 47 51 61 68 76Gujarat State Fertiliser & Chemicals (GSFC) 37 31 45 46 41Deepak Fertilisers 30 32 47 44 69Chambal Fertilisers 36 40 32 35 79Rashtriya Chemicals & Fertilizers (RCF) 28 28 34 35 40Gujarat Narmada Valley Fertilisers & Chemicals (GNFC) 22 24 27 31 29National Fertiliser (NFL) 8 12 19 20 17

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research Inventory days Companies FY15 FY16 FY17 FY18 FY19National Fertiliser (NFL) 12 18 25 23 32Nagarjuna Fertiliser 30 18 24 17 35Mangalore Chemicals & Fertilisers (MCFL) 34 35 36 45 56Chambal Fertilisers 30 38 46 43 54Deepak Fertilisers 34 41 46 38 43Gujarat State Fertiliser & Chemicals (GSFC) 44 35 43 46 54Zuari Agro 44 41 41 44 63Rashtriya Chemicals & Fertilizers (RCF) 42 48 49 38 45Gujarat Narmada Valley Fertilisers & Chemicals (GNFC) 39 55 50 41 47Coromandel International 80 82 70 84 102

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research



ROCE and ROE • The return ratios for the fertiliser sector have always remained muted, largely

driven by delays in government subsidy payments, resulting into higher working capital requirement, especially for pure urea companies such as RCF, NFL and Nagarjuna Fertiliser.

• Coromandel and Chambal fertiliser have generated better returns among Indian peers, led by focusing on core business areas, better working capital management, and better product offerings.

ROCE (%) Companies FY15 FY16 FY17 FY18 FY19Coromandel International 21 17 20 22 24Gujarat Narmada Valley Fertilisers & Chemicals (GNFC) (4) 8 15 24 16Chambal Fertilisers 10 10 11 10 10Deepak Fertilisers 8 10 9 9 6Gujarat State Fertiliser & Chemicals (GSFC) 12 10 6 7 9Rashtriya Chemicals & Fertilizers (RCF) 15 8 7 4 3National Fertiliser (NFL) 5 7 9 10 11Zuari Agro 7 5 6 9 5Nagarjuna Fertiliser (4) 7 6 10 ‐11Mangalore Chemicals & Fertilisers (MCFL) 8 (8) 9 9 8

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research ROE (%) Companies FY15 FY16 FY17 FY18 FY19Coromandel International 25 21 20 26 27Chambal Fertilisers 13 20 18 20 25Gujarat State Fertiliser & Chemicals (GSFC) 9 8 7 7 7National Fertiliser (NFL) 1 6 12 11 ‐59Deepak Fertilisers 5 8 9 8 4Rashtriya Chemicals & Fertilizers (RCF) 13 6 6 3 5Gujarat Narmada Valley Fertilisers & Chemicals (GNFC) (19) 5 15 19 16Zuari Agro 2 (12) (3) 7 ‐16Mangalore Chemicals & Fertilisers (MCFL) 7 (53) 6 14 7Nagarjuna Fertiliser (20) (6) (11) (2) 14




Peer group valuation Market

Cap Revenue

FY19 EBITDA Margin CAGR FY19‐21e (%) EPS (Rs) PE (x)

Companies (US$mn) (Rs bn) (FY19) (%) Rev EBITDA EPS FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22e Coromandel Int* 111 132 12.0 2.7 6.9 5.0 30.5 26.3 30.2 35.3 12.5 14.4 12.6 10.8 Chambal Fert* 64 102 12.9 8.3 13.6 17.2 14.2 18.6 20.2 22.8 10.9 8.3 7.7 6.8 GNFC 27 59 14.7 Na Na Na 48.2 Na Na Na 3.6 Na Na Na GSFC 30 85 8.8 9.4 9.1 6.9 12.4 13.6 14.2 Na 6.0 5.4 5.2 Na RCF 22 89 5.0 Na Na Na 2.4 Na Na Na 16.5 Na Na Na NFL 13 122 6.7 Na Na Na 6.0 Na Na Na 4.3 Na Na Na Deepak Fert 7 67 6.8 (8.2) 22.4 80.9 8.0 20.7 26.2 Na 9.7 3.8 3.0 Na Zuari Agro 4 81 3.9 Na Na Na (36.9) Na Na Na Na Na Na Na MCFL 3 31 6.1 Na Na Na 2.8 Na Na Na 10.5 Na Na Na Nagarjuna Fert 2 19 (7.1) Na Na Na (8.2) Na Na Na (0.4) Na Na Na

EV/EBITDA (x) D/E (x) ROE (%) ROCE (%) Companies FY19 FY20e FY21e FY22e FY19 FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22e Coromandel Int* 8.7 9.0 8.0 6.6 0.9 26.6 19.2 18.5 18.2 23.6 20.6 20.7 21.1 Chambal Fert* 12.2 9.3 8.4 6.7 3.0 27.3 21.8 19.5 18.5 10.0 11.1 11.8 13.5 GNFC 5.4 Na Na Na 0.1 15.6 Na Na Na 17.1 Na Na Na GSFC 6.8 4.6 4.4 Na 0.1 6.7 7.1 7.1 Na Na Na Na Na RCF 14.7 Na Na Na 0.5 4.5 Na Na Na 3.3 Na Na Na NFL 9.8 Na Na Na 1.5 14.1 Na Na Na 6.4 Na Na Na Deepak Fert 8.2 5.4 4.9 Na 1.5 3.4 8.3 9.8 Na 7.8 Na Na Na Zuari Agro 19.2 Na Na Na 3.1 (11.3) Na Na Na 48.4 Na Na Na MCFL 11.1 Na Na Na 0.3 6.8 Na Na Na 19.9 Na Na Na Nagarjuna Fert Na Na Na Na 1.5 (59.1) Na Na Na Na Na Na Na

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research,*PhillipCapital Estimates


Page | 44 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker‐dealer unregistered in the USA. PHILLIPCAP researchis prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a‐6 of the Securities Exchange Act of 1934 solely byRosenblatt Securities Inc, an SEC registered and FINRA‐member broker‐dealer.

Coromandel International (CRIN IN) Winning with unique grades, limited subsidy exposure INDIA |FERTILISER | Initiating Coverage

4 September 2019

Leading phosphate player with a high share of unique‐grade products CRIN has a dedicated R&D facility that focuses on new‐product development, which is expected to drive sales volumes through contribution from unique‐grade products (branded). It aims to have 50% revenue contribution from these products over the next 3‐4 years vs. 38% currently. The company is poised to achieve above‐peer‐average growth through: (1) better demand for complex grades on balanced usage, and (2) premium MRPs for unique grades driving better realisations. Balanced usage of nutrients to support CRIN’s growth The government’s drive for balanced usage of fertilisers – by implementing 45kg bags for urea, compulsory neem coating for urea, and supporting secondary/micro nutrients by providing additional subsidy under the Nutrient Based Subsidy (NBS) policy – should benefit CRIN the most because it is a market leader in NP/NPK/NPS. CRIN is also gradually expanding towards eastern and western regions, which will help to increase its sales volumes. Crop‐protection segment to see high growth CRIN is the fifth‐largest agrochemicals company in India with much‐better profitability compared with fertiliser companies. We expect the crop‐protection segment to deliver a revenue CAGR of 8% in FY19‐22 vs. 3% CAGR in phosphatic fertilisers, backed by opportunities in off‐patent molecules, rising labour costs, and rising incidence of pests. CRIN has launched five new products in FY19 and aims to introduce 2‐3 molecules annually, to tap into export‐market opportunities. DBT is likely to reduce subsidy burden and working‐capital requirements CRIN has very limited exposure to government subsidy at c.23% in FY19 compared to urea companies which have about 70%. It should be the biggest beneficiary of the DBT implementation that started early 2018. It had c.85 receivable days for government subsidy in FY18, which reduced to 66 in FY19; we expect these to improve even more in FY20‐22. Capacity expansion in phosphoric acid at Vizag will reduce captive cost CRIN is expanding its phosphoric acid capacity by 100,000 tonnes at its Vizag plant with a capex of c.Rs 3bn. It expects this to be completed by H2FY20. We reckon that the expansion will lead to cost saving of about Rs 500/1000mn in FY20/21. This will lead to savings in captive cost by US$ 10/20 per tonne in FY20/21. Outlook and valuation CRIN, a Murugappa group company, is a leading private player in the non‐urea space offering unique‐grade products. It has diversified into the high‐margin segment of speciality nutrients and crop protection. Its product portfolio has limited exposure to government subsidy (c.23% of revenue vs. c.70% for urea companies) and it generates high margins in crop protection, speciality nutrients, and complex‐grade sales. CRIN currently trades at 13x/8.7x FY19 EPS/EBITDA. Historically, it has traded at a premium compared to Indian peers due to its better product offerings and diversification into higher‐margin businesses. We expect it to continue commanding a premium among Indian peers despite short‐term concerns about high inventories, which are likely to impact volume growth in FY20. We assign a EV/EBITDA multiple of 9x on Sept FY21 EPS, at the lower end of its trading range, to arrive at a target of Rs 500 (implying target PE of 15x to Sept FY21) with a Buy recommendation.

BUY CMP RS 380 TARGET RS 500 (+32%) COMPANY DATA O/S SHARES (MN) : 293MARKET CAP (RSBN) : 111MARKET CAP (USDBN) : 1.552 ‐ WK HI/LO (RS) : 520 / 337LIQUIDITY 3M (USDMN) : 1.1PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Jun 19 Mar 19 Dec 18PROMOTERS : 61.8 61.8 61.8FII / NRI : 4.3 4.9 5.9FI / MF : 12.3 11.6 10.2NON PRO : 12.2 12.1 12.6PUBLIC & OTHERS : 9.4 9.6 9.6 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 1.2 ‐12.3 ‐7.0REL TO BSE 2.8 ‐3.4 ‐2.7 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rsmn FY19 FY20E FY21ENet Sales 1,32,246 1,25,148 1,34,337EBIDTA 15,914 15,210 17,080Net Profit 8,927 7,701 8,836EPS, Rs 24.6 26.3 30.2PER, x 12.5 14.4 12.6EV/EBIDTA, x 8.7 9.0 8.0P/BV, x 3.3 2.8 2.3ROE, % 27 19 19Debt/Equity (%) 88 69 59

Source: PhillipCapital India Research Est. Deepak Chitroda (+ 9122 6246 4117) [email protected] Surya Patra (+ 9122 6246 4121) [email protected]

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Coromandel Fert BSE Sensex




COROMANDEL INTERNATIONAL INITIATING COVERAGE

About the company • Secunderabad‐headquartered company. Incorporated in 1964. Currently owned

by the Murugappa group (US$ 4.5bn EV) and EID Parry (India), which together hold about 62% of the company.

• Started as a non‐urea fertiliser company; expanded into other segments such as specialty nutrients and crop protection. Product offerings now cover agriculture solutions across the farming value chain.

• India’s largest private phosphatic fertiliser company with a revenue of Rs 132bn in FY19. Fifth‐largest agrichemicals company with segmental revenue of Rs 16bn in FY19.Largest Single Super Phosphate (SSP) player with revenue of Rs 3.5bn in FY19.

• c.4,768 employees and c.6,900 contract staff. • Two business segments:

o Fertilisers (nutrient or subsidy) segment – nutrient and allied business (c.87% of revenue)

o Crop protection (non‐subsidy segment; c.14% of revenue). o Business structure: Phosphate fertilisers (subsidy business for

DAP/NP/NPK/NPS/SSP/MOP) has 76% revenue share in FY19 and non‐subsidy segments (speciality nutrient, organic fertilisers, retail, and crop protection) contribute about 20%. The subsidy business contributes 66% to EBITDA; rest comes from non‐subsidy.

• Nutrient products brand – Gromor. c.15 different varieties of NP/NPK/NPS containing nitrogen, phosphate, potassium, sulphur, and additional secondary nutrients.

• The subsidy business (fertilisers) includes sales from specialty nutrients, trading, and other by‐products such as phosphor‐gypsum.

CRIN’s evolution

Source: Company, DoF, Phillip capital India Research

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2013: – Bought Liberty Phosphate (SSP)

2018: – Bio pesticide acquisition

2012: – Technology tieup with Shell

1964: – Incorporated in 1964 as part of Murugappa Group– Started as JV between IMC,Chevron,EID Parry

1990: – Bought out Chevron and IMC stake– Expanded Vizag capacity– Revamped Ennore/Ranipet Plant

2003: – EID Parry farm input business merged with CIL 2006: – CPC ‐Acquisition

of FICOM and new plant in Jammu

2009: – CPC ‐Acquisition of FICOM and new plant in Jammu

2010: – CPC ‐Acquired Pasura Biotech– ESF with SQM

2011: – Godavari acquisition– CPC ‐ Sabero acqusition

2014: – Expansion at Kakinada– Farm mechanization ‐Yanmar JV

2015: – CPC ‐Establised China office and R&D centre



CRIN business model

Source: Company, Note: FY19 revenue share CRIN’s presence is largely focussed on the south and western regions • Three primary manufacturing facilities: Kakinada, Ennore, and Vizag for

production of fertilisers (except SSP) out of which Ennore and Vizag units are backward integrated with phosphoric acid facilities; Kakinada largely depends on imported raw materials.

• Major raw material requirements for Ennore and Vizag units are ammonia, phosphate rock, and sulphur/sulphuric acid. Kakinada directly imports phosphoric acid and ammonia.

• All three plants are near ports, which helps save logistics and freight costs while importing raw materials.

• The total capacity of three plants is c.3.5mn tonnes and capacity utilisation was c.83% in FY19.

• CRIN is the largest SSP player in India with 8 SSP units with a capacity of 1.2mn tonnes and production of 0.6mn tonnes in FY19.

• It is the second largest player in non‐urea sales and the largest in complex fertiliser sales (excluding DAP).

Strategic location

Source: Company, PhillipCapital India Research

Phosphatic fert (48%)

Urea (4%)

MOP (1%)

SSP (3%)

Others (7%)

Govt subsidy (23%)

Crop protection (14%)



CRIN’s fertiliser plant‐wise operations and sourcing of raw materials Location Phosphate fertilizer capacity Phosphoric acid

capacity Raw material requirement Raw material sourcing

Kakinada (Flexible plant across the grades with major focus on DAP)

1.9 Imported ammonia and phosphoric acid

Ammonia – Qafco/spot/contract Phosphoric acid – TIFERT, Foskor, OCP, Nutrien (Quarterly contract price)

Vizag (Flexible plant across the grade with major focus on complexes)

1.2 Phosphate rock, sulphur, sulphuric acid

Phosphate rock – OCP, JPMC, Egypt Sulphur – Mitsui/Spot Sulphuric acid – Spot/contract (Japanese suppliers) Ennore (Flexible plant across

the grade with major focus on complexes)

0.3 Phosphate rock, sulphur, sulphuric acid

Total Phosphate fertiliser 3.4 0.3 SSP capacities Ranipet Phosphate rock, sulphuric

acid Phosphate rock – Jhamarkotra Phos. Rock mine of RSMM in Udaipur, various Egyptian suppliers. Sulphuric acid – Locally sourced from smelters such as Hindustan Zinc, Sterlite. One or two SSP units are backward‐integrated having sulphuric acid capacity for which sulphur is locally sourced from refineries or imported.

Munirabad Udaipur Vadodara Kota Pali Raebareli Nimrani

Total SSP Capacity 1.2

Source: Industry, DoF, Phillip Capital India Research,



Investment rational Leadership in largest consuming state CRIN has strong marketing and distribution reach in southern states, especially in AP and Telangana, which generated c.55% of its sales volumes in FY19. It is gradually growing in other states such as Maharashtra, Karnataka and some eastern states. It trades in MOP and urea to cater to all farmers’ needs. CRIN is driving c.55% sales of DAP and other grades from AP and Telangana

Source: DoF, Industry, PhillipCapital India Research, FY19 share Leader in phosphatic fertilisers CRIN is the largest player in NP, NPK, NPS sales with c.25% market share and the second largest with a market share of c.16% after IFFCO in the non‐urea segment. It is also the largest SSP player with dedicated plants across the country. Its offerings in unique‐grade products are growing, as farmers in India’s southern region use more balanced nutrients vs. the rest of the states, mainly because they grow cash crops. In non‐urea*, CRIN is the largest private player CRIN leads in the P&K market

Source: Company, DoF, Phillip capital India Research, *DAP/NP/NPS/NPK Leader in the non‐urea space too Affordability (for farmers) plays an important role in the growth of consumption. This is especially true after the Nutrient Based Subsidy (NBS) policy prices of non‐urea fertilisers increased five times more than urea (whose MRP is still controlled by the government and has not changed for more than a decade). This made urea products cheaper than non‐urea ones. As a result, farmers procure non‐urea fertilisers grades

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CRIN has a c.25% market share in NP/NPK/NPS sales

The MRP gap between urea (cheaper) and non‐urea fertilisers is huge.

Incidentally, AP and Telangana are the larger consuming P&K states in the country



such as DAP and other NP/NPS/NPK fertilisers very ‘consciously’ depending on the nutrient requirements of their crops. CRIN plays an important role in catering to the needs of farmers in the non‐urea space and has become the market leader (c.25% market share) in this space (except in DAP). It has developed and offers varieties of complex grade fertilisers. It helps that the general consumption pattern in India is moving towards balanced usage of primary nutrients, where we believe CRIN’s portfolio is better‐placed. Unique‐grades sales are expected to reach 50%

Source: Phillip Capital India Research, Company Unique grades becoming popular, especially in the south The usage of unique grades helps farmers to improve yields (more than traditional grades) and covers the micro‐nutrient requirements for soil. CRIN sells some unique grades of NP/NPK/NPS (20‐20‐0‐13, 16‐20‐0‐13, 14‐35‐16, etc.) by adding micronutrients or secondary nutrients such as zinc and sulphur compared to traditional products that carry only nitrogen, phosphate, and potassium. These grades are becoming popular, especially in the southern region, and are highly used in crops such as fruits and vegetables, tobacco, and other traditional crops. Unique grades earn better margins than traditional grades because the government provides additional subsidy for fortified fertilisers with boron at Rs 300/tonne and with zinc at Rs 500/tonne. CRIN is aiming to increase the sales contribution of these unique grades to c.50% of its total in the next 3‐4 years vs. 36% in FY19; this will support volume and revenue growth by FY22. Global tie‐ups, alliances alleviate material sourcing risk There are very limited domestic sources of raw materials and all non‐urea producers source raw materials such as phosphoric acid, phosphate rock, ammonia, sulphur, and sulphuric acid majorly from the international market. In case of supply shortages, most producers are affected. However, CRIN has raw‐material and technology tie‐ups with leading global suppliers, which support its sourcing needs.

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With its alliances, CRIN has the strategic advantage of sourcing raw material on time



Global alliances for sourcing and technology tie‐ups

Source: Company Alliances • TIFERT – Phosphoric acid JV in Tunisia wherein GSFC, CRIN and GCT are partners. • Foskor – CRIN is holding 14% in a South African phosphoric acid and fertiliser

producer. • CANPOTEX – MoU for potash supply with a Canadian giant; Canadian Potash

Exporters is an exporting and marketing firm owned by two members – Nutrien and Mosaic.

• Morocco, Israel, Togo and Algeria – Regular supply for phosphate rock with large suppliers.

• Qafco – Tie‐up with Qatar‐based suppliers for sourcing urea and ammonia as raw materials.

• Mitsui – Tie‐up for sourcing ammonia and sulphur from Japanese suppliers. • SQM – JV with SQM in Chile for supplying water‐soluble fertilisers. • Yanmar Coromandel Agrisolutions Pvt Ltd (YCAPL) – JV with Yanmar and Mitsui;

sales and service of agri‐tech equipment, focussed on farm mechanisation. Key beneficiary of the government’s focus on raising farmers’ income • CRIN is likely to benefit the most from the government’s initiatives to support

farmers’ income via various schemes – this is because it is the largest player in non‐urea fertilisers.

• Schemes include those announced by the central government – such as investments into irrigation, crop insurance for crop losses and damages, electronic market for selling crops on time, increasing soil‐health‐cards penetration, and more credit facilities for farmers.

• A recent announcement has been PM‐KISAN – which provides income support of Rs 6,000 to all farmers. This is likely to support farmers’ purchases of fertilisers.



Key beneficiary from rising farmers’ income via government initiatives Major government initiatives Expected impact Crop insurance schemes Secures crop‐loss risk. Improves the confidence for more

sowing area. Focus on irrigation and micro irrigation Will support farmers in planting multiple crops and reduce

dependency on monsoon. Soil health cards Government can give better advice to farmers on crop planting

and usage of agri inputs. Agriculture credit Funding towards agriculture has increase substantially,

specifically over the past three years Trading platform (e‐NAM) Linking of mandis across the country will facilitate farmers in

selling produce at better prices. Government is aiming to link 22,000 mandis by 2022 from only 585 currently.

Source: Industry, PhillipCapital India Research Strong rural retail presence helps it to offer complete farm solutions CRIN forayed into the rural retail segment in 2007 to offers varieties of products and services at a single location. It expanded retail stores from just 20 to c.800 across Andhra Pradesh and Telangana and Karnataka. Majority of its stores/centres are profitable (c.70% revenue of the revenue from retail outlets is from owned products) and self‐sustaining. It plans to take a similar approach in other states such as Maharashtra. At its retail stores, CRIN also offers services such as farm mechanisation, agri insurance, credit, and soil testing. The retail model is aiding CRIN in selling an entire portfolio of products and to build long‐term relationships with farmers for the Gromor brand. Number of retail stores

Source: Company Specialty nutrients and organic manure support non‐subsidy business • Speciality nutrients cover water‐soluble fertiliser (WSF), micro nutrients, and

bentonite sulphur. • This segment provides crop‐specific solutions for cereals, cotton, potatoes,

pulses and fruits/vegetables. These products have higher efficiency and generate better yields for farmers.

• CRIN has a JV with SQM to produce exclusive WSF grades (Speedfol, Insta, Superia, Ultrasol).

• The government’s push for organic fertilisers, waste treatment and management, soil health management, and green initiatives provide better opportunities for CRIN’s organic manure segment. These volumes have increased – from 20,000 tonnes in FY09 to 130,000 tonnes in FY19 – making the company a market leader.

20

300

400 423

641

800

Dec‐07 Dec‐08 Mar‐09 Mar‐11 Mar‐13 Mar‐16

CRIN should be the biggest beneficiary of Telangana’s Rythu Bandhu scheme, which provides Rs 4,000 per acre per farmer each season (kharif and rabi) for buying agri inputs; the aim is to limit farmers’ exposure to credit



CRIN’s focus on organic fertilisers to drive growth

Source: Company

Organic fertilisers

Bio/Microbial & Organic fertiliser

N ‐ Nrch(oil cake)

P – Phosgold(Compost + Rock P)

K – Kash(Molasses)

Bio compost (Soil Health Enabler)

City Compost

Press Mud (by prod sugercane)

Oil Cakes



Crop‐protection to drive faster growth in FY19‐22 Crop protection segment to see better growth • CRIN is the fifth‐largest Indian player with a crop‐protection revenue of Rs 18bn

in FY19 and manufacturing facilities in six locations (Jammu, Dahej, Ankleshwar, Sarigam, Ranipet, and Caddalore). It has a product portfolio of about 60 brands.

• Through Sabero Organic’s acquisition, it supplies technical products to formulation partners and largely via B2B and B2C mediums.

• In this segment, it derives c.55% revenue from India and the rest from APAC, Africa, America, and Europe.

• CRIN is expected to benefit in coming years with growing opportunities in the

agrochemicals sector – such as off‐patent molecules, rising labour costs, and rising incidence of pests. We expect crop‐protection segment revenue CAGR of 7% in FY19‐22.

• Margins in this segment are much higher; PBIT of c.16% in FY19 vs. c.10% in fertilisers – which supports its subsidy business.

• Launched five new products in FY19; aims to introduce 2‐3 molecules annually to tap opportunities in the export market.

• CRIN’s bio‐pesticide business (that it bought from EID Parry in 2017) is a fast growing market in the USA, Europe, and Canada. It will support its crop protection division in FY20‐22.

Crop protection revenue and share is steadily increasing

Source: Phillip Capital India Research, Company Expanding in the no‐subsidy side of the business through inorganic growth


0%

3%

6%

9%

12%

15%

18%

‐

5

10

15

20

25

FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Rs bn

Crop protection Share, rhs



To benefit from balanced usage of fertilisers and DBT The government’s focus on increasing balanced usage of fertilisers through measures such as neem‐coating of urea and introduction of 45‐kg bags, is expected to benefit CRIN because of its strongest market share – at c.25% in NP/NPS/NPK. The ideal fertiliser consumption ratio is considered to be 4:2:1 for Nitrogen:Phosphorus:Potassium, but the all‐India consumption ratio is 6.5:2.5:1. This provides significant opportunities for CRIN to expand the market‐share of its product portfolio, especially in north regions (Punjab/Haryana/UP) where consumption of urea (nitrogen) is very high. N:P:K ratio (north and west region) N:P:K ratio (south and east region)

Source: DoF, Industry, Phillip Capital India Research, N: P: K ratio of FY18 The government is preparing to implement DBT in its true form – i.e., subsidy directly into farmers’ accounts. With this, farmers will be able to consume fertilisers based on crop and soil needs rather than opting for cheaper fertilisers blindly, which they do today. We expect CRIN to benefit the most from DBT, considering its market positioning in P&K fertilisers and presence in specialty and other nutrient offerings. Product and subsidy flow before and after DBT


26 23 19 14 4 3 34 13 10

6 3 2

6 6 3 5

1 1

13 7 3

3 2

1

1 1 1 1 1 1

1 1 1 1 1 1

Punjab

Haryana

Uttarakhand UP

J&K HP

Rajasthan

MP

Gujarat

Chhattisg

arh

Maharashtra

Goa

K

P

N

6 6 4 3 3 2

7 6 5 4 3 3 2 2

2 1 2 2 1 1

2 5 2 1 1 1 2 1

1 1 1 1 1 1 1 1 1 1 1 1 1 1

Telangana

Pudu

cherry AP

Karnataka

TN

Kerala

Bihar

Jharkhand

Odisha

Assam

Tripura

Manipur

Nagaland

West B

engal

K

P

N

High consumption of nitrogen (especially urea) is deteriorating soil health



CRIN’s receivable days to improve gradually with implementation of DBT

Source: Phillip Capital India Research, Company Backward integration for phosphoric acid will reduce costs CRIN is expanding its phosphoric acid capacity by about 100,000 tonnes at its Vizag plant at a cost of c.Rs 3bn. This backward integration is aimed at reducing captive costs and lowering its dependency on imports of phosphoric acid. We estimate this expansion will lead to savings of c.Rs 500mn in FY20 and c.Rs 1,000mn in FY21 in total phosphoric acid costs, assuming other costs of producing such as phosphoric rock, sulphur, and sulphuric acid remain the same. Also, we expect captive costs of phosphoric acid to reduce by c.US$ 10/tonne in FY20 and c.US$20/tonnes in FY21. The saving will support CRIN’s margins in FY20/22. Full benefits will start by early H2 FY20 and full integration benefits will be seen in FY21. Phosphoric acid consumption and EBITDA margin

Source: Company, Industry, Phillip Capital India Research Raw material prices are falling and expected to boost margins for CRIN We have factored imported phosphoric acid/ammonia/phosphate rock/sulphur/sulphuric acid prices at US$ 690/275/90/145/70 per tonne for FY20‐21. We remain conservative with the assumption of raw‐material prices at close to the past two years’ average, compared with present prices – which are much lower. We believe CRIN will benefit more with better margins if current prices remain stable for FY20 (we have assumed higher). For instance, the phosphoric acid contract price for Q2 CY19 is down to US$ 655 per tonne vs. US$ 728 in Q1 CY19. Also, ammonia price corrected 30% yoy to c.US$ 250/tonne in July 2019.

‐

25

50

75

100


Days

Debtors Govt subsidy receivables

10.0%

10.8%

11.6%

12.4%

13.2%

14.0%

‐

0.20

0.40

0.60

0.80

1.00

FY17P FY18P FY19P FY20E FY21E FY22E

EBITDA

Margin %

mn t

Captive Imported EBITDA margin, rhs



Phosphoric acid is a major raw material with a share of c.50% in total costs

Source: Phillip Capital India Research Our raw material price assumption FY19P FY20E FY21E Comment Phosphoric acid price 747 690 690 Q2 CY19 prices fell to US$655 per tonne indicating

significant upside in margins for FY20 Sulphuric acid 84 70 70 Price remained stable after touching US$100/tonne on

short supply (Sterlite Copper) Sulphur 150 145 145 Sulphur spot price corrected to c.US$110/tonne Phosphate rock 94 90 90 A correction in phosphoric acid price should support

phosphate rock reduction Ammonia 300 275 275 Ammonia price already lower than US$300/tonne;

likely to remain stable MOP (Potash) 270 270 270 Potash will see some correction in 2019‐20 contract

prices

Source: Phillip Capital India research, USD/tonne India CFR Raw material prices see a downward trend Phosphoric acid price Ammonia price

Source: Bloomberg, Industry, PhillipCapital India Research, *India CFR USD/tonne

0%

20%

40%

60%

80%

100%

FY19P FY20E FY21E FY22E

Others

Sulphur

MOP

Phosphate rock

Ammonia

Phosphoric acid

500

550

600

650

700

750

800

Jan‐17

Mar‐17

May‐17

Jul‐1

7

Sep‐17

Nov

‐17

Jan‐18

Mar‐18

May‐18

Jul‐1

8

Sep‐18

Nov

‐18

Jan‐19

Mar‐19

USD

/ton

ne

150

200

250

300

350

400

Jan‐17

Mar‐17

May‐17

Jul‐1

7

Sep‐17

Nov

‐17

Jan‐18

Mar‐18

May‐18

Jul‐1

8

Sep‐18

Nov

‐18

Jan‐19

Mar‐19

May‐19

Jul‐1

9

USD

/ton

ne



Potash (MOP) price Phosphate rock, sulphur, and sulphuric acid price

Source: Bloomberg, Industry, PhillipCapital India Research, *India CFR USD/tonne Sensitivity analysis In our estimates, we have assumed higher phosphoric acid price at US$690/tonne vs. prevailing US$655. Any moderation will drive expansion in margins. Since phosphoric acid accounts for about 50% of raw material costs, a 5% correction leads to about 100bps improvement in margins. Phosphoric acid price changes and its impact on margins FY20E FY21E FY22E Price US$/tonne 690 690 690 Base case (No change) 0% 0% 0% Bull case (5% down) ‐5% ‐5% ‐5% Bear case (5% up) 5% 5% 5% EBITDA Margin Base case (No change) 12.2% 12.7% 13.6% Bull case (5% down) 13.4% 14.1% 14.7% Bear case (5% up) 11.6% 12.4% 13.1%

Source: PhillipCapital India Research Impact on EBITDA margin with change (+/‐ 5%) in phosphoric acid price


200210220230240250260270280290300

Jan‐17

Mar‐17

May‐17

Jul‐1

7

Sep‐17

Nov

‐17

Jan‐18

Mar‐18

May‐18

Jul‐1

8

Sep‐18

Nov

‐18

Jan‐19

Mar‐19

USD

/ton

ne

0

50

100

150

200

250

Jan/17

Mar/17

May/17

Jul/1

7

Sep/17

Nov/17

Jan/18

Mar/18

May/18

Jul/1

8

Sep/18

Nov/18

Jan/19

Mar/19

May/19

Jul/1

9

USD

/ton

ne

Phos rock Sulphuric acid Sulphur

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

EBITDA

margin%

Base case (0%) Bull case (‐5%) Bear case (+5%)

The table shows the effect of changes in phosphoric acid and phosphate rock prices on EBITDA margins and EPS for FY20 and FY21



Financial performance Higher inventories scenario and declining international prices to keep revenue growth muted in near term CRIN became a market leader in the non‐traditional portfolio of products by continuously focusing on new products in unique‐grade fertilisers with specialty nutrients. It has limited exposure to government subsidy compared with pure urea players, thereby limiting its working‐capital requirements. It is expected to see a revenue CAGR of 3% in FY19‐22, primarily driven by a gradual improvement in realisation and sales volumes. However, lower growth in revenue (mainly phosphatic fertilisers) in FY20 is likely to be driven by high inventories at various channels. We believe that the high‐inventories situation will normalise by H1FY20 with a recovery in the rabi‐season demand and that CRIN is likely to recover sales volumes for phosphate fertilisers. We expect CRIN’s market leadership in SSP to support growth in FY20‐22 as farmers tend to consume cheaper fertiliser to reduce cost of cultivation in weak seasons. In addition, CRIN’s larger presence in crop protection will benefit revenue growth (7% CAGR) in FY20‐22. CRIN’s segmental revenue Segment FY19 FY20E FY21E FY22E FY19‐FY22E (CAGR) Business areas Phos. Fertilisers 64 58 62 67 1% Manufacturing Urea 5 5 6 6 4% Trading MOP 2 2 2 2 0%SSP 4 4 4 4 4% Manufacturing Government subsidy 31 30 32 33 Subsidy revenue of phosphoric fertiliser/MOP/SSP Others 9 10 10 11 5% Specialty nutrients/Others Crop protection 18 17 19 22 7% Agro chemicals Gross Revenue 133 125 134 144 3%

Source: Phillip Capital India Research, Company, Rs bn Margins to see about 200bps expansion over FY19‐22e In the past four years, CRIN consistently improved EBITDA margins (from 8.5% in FY16 – to 12% in FY19) led by phosphatic fertilisers and crop‐protection segments. However, we expect EBITDA margin to be under pressure in FY20 considering the high‐inventory situation that would lower realisations and sales volumes (discounts on MRPs; some inventory losses). Full benefits of the captive phosphoric acid expansion at Vizag will reflect in improvement in margin only in FY21, in which year, absorption of high inventories will also provide a boost. There were no changes in the NBS subsidy for nitrogen (N), phosphate (P), and potassium (K) in FY20, except for Sulphur (S), which increased by 30% per kg compared with FY19. We expect these changes to support subsidy realisations of NPS grades, mainly ‘20‐20‐0‐13’ and ‘SSP’ (33‐35% of CRIN’s sales volume) and hence support margins – as CRIN has a larger presence in these products.

CRIN’s EBITDA margin for fertilisers has continuously increased since FY15, driven by improved realisations and volumes growth contribution from unique‐grade sales. We expect this improvement to continue over the long term based on: (1) increasing share of unique‐grade sales, (2) lower captive cost for phosphoric acid, and (3) farmers’ awareness about balanced usage of fertilisers is increasing. However, we expect higher inventories of non‐urea fertilisers to restrict sales volumes and also dent margins in FY20.



Margins growth is better compared to revenue Non‐subsidy revenue to see better growth in FY19‐22

Source: Company, Phillip Capital India Research, Industry Despite capex phosphoric acid/other capex; return ratios to remain at c.20%

Source: Company, Phillip Capital India Research, Industry Debt/equity position remains within comfortable limits

Source: Company, Phillip Capital India Research, Industry

‐

20

40

60

80

100

120

140

160

0%

2%

4%

6%

8%

10%

12%

14%

16%


Revenu

e Rs bn

EBITDA

Margin %

Revenue EBITDA Margin (%), rhs

‐

20

40

60

80

100

120


Rs bn

Subsidy Non‐subsidy

‐

5

10

15

20

25

30

FY17 FY18 FY19 FY20E FY21E FY22E

%

ROE ROCE

‐

0.2

0.4

0.6

0.8

1.0

1.2

‐10

‐5

0

5

10

15

20

25

30

35

FY15 FY16 FY17 FY18 FY19 FY20e FY21e FY22e

Debt/equ

ity (x)

Cape

x, Op cashflo

w, D

ebt (Rs bn)

Capex Op cashflow Debt Debt/Equity (rhs)



Valuation and outlook Outlook • CRIN is a leading player in non‐urea space, offering high‐margin unique‐grade

products, high‐margin speciality nutrients, and crop protection products. Unique grade products command a premium over other companies’ offering including peers such as Deepak Fertiliser, Zuari Agro Chemicals, IFFCO, GSFC and Paradeep Phosphate.

• CRIN’s backward integration into a phosphoric acid capacity at Vizag will help minimise captive cost of production and improve margins. Also, its south‐based competitors such as Mangalore Chemicals, Zuari Agro, and Madras Fertiliser do not have captive phosphoric acid capacities, which places CRIN in a position to earn better margins.

• CRIN is best placed among Indian fertiliser companies and is likely to benefit the most in the coming years with: (1) implementation of DBT (direct subsidy to farmers’ bank accounts), (2) the government’s focus on increasing farmers’ income with various initiatives, (3) change in consumption pattern of fertilisers (balanced usage), and (4) integrated manufacturing facilities.

• High inventories situation in various channels (distributors/companies/retailers) remains a short‐term concern for CRIN at least in H1FY20. We expect inventories to reduce and domestic demand to recover in H2FY20, but we expect FY20 sales volumes to decline by about 3% with some reduction in MRPs for various grades.

Valuations CRIN is the leader in non‐urea products among listed companies with backward integration in producing captive phosphoric acid, presence in agrochemicals, and a unique product offering. Therefore, it has always traded at a premium to Zuari Agro, GSFC, Mangalore Chemicals, Deepak Fertiliser, and RCF. However, global phosphatic fertiliser companies such as Mosaic, Nutrien, and PhosAgro trade at a marginal premium to CRIN due to their backward integrated operation (like own phosphate rock mining). We expect CRIN to continue commanding premium valuations among Indian peers, but concerns about higher inventories in various channels are likely to keep valuations under check in the short term (FY20). We assign a EV/EBITDA multiple of 9x on Sept FY21 EPS, at the lower end of its trading range, to arrive at a target of Rs 500 (implying Sept FY21 target PE of 15x) with a Buy recommendation.



One‐year forward P/E band One‐year forward EV/EBITDA band

Source: Company, Phillip Capital India Research, Industry Key risks Downside • High raw materials prices remain a key earnings risk, especially phosphoric acid

(40‐45% of RM cost), ammonia, and phosphate rock (for captive production). • Higher inventories for DAP and NP/NPK/NPS at various channels should force

CRIN to offer discounts to MRPs or cut MRPs. • Depreciation of the Indian rupee against the USD will increase raw‐material

costs, as most of the raw materials are imported. • Deficient rainfall (especially in the southern region – AP and Telangana) would

affect CRIN’s volumes growth. • Delay in the subsidy disbursement under DBT will increase working capital needs. • Proposed/planned capacity expansion by competitors such as Deepak Fertiliser,

Zuari Agro, Kribhco (at Krishnapatnam), and Mangalore Chemicals may reduce sales volumes.

Upside • Lower raw‐material prices will significantly support margins as CRIN is generating

better margins by producing complex grades vs. DAP. • Appreciation of the Indian rupee vs. the USD.

5x

10x

15x

20x

0

100

200

300

400

500

600

700 Rs

3x

6x

9x

12x

0

40000

80000

120000

160000

200000

240000 Rs mn



Financials

Income Statement Y/E Mar, Rsmn FY19 FY20e FY21e FY22eNet sales 1,32,246 1,25,148 1,34,337 1,43,326Growth, % 19 ‐5 7 7Total income 1,32,246 1,25,148 1,34,337 1,43,326Raw material expenses ‐93,396 ‐88,244 ‐93,969 ‐99,019Employee expenses ‐4,111 ‐3,880 ‐4,164 ‐4,443Other Operating expenses ‐18,825 ‐17,815 ‐19,123 ‐20,402EBITDA (Core) 15,914 15,210 17,080 19,462Growth, % 22 ‐4 12 14Margin, % 12.0 12.2 12.7 14Depreciation ‐1,138 ‐1,404 ‐1,520 ‐1,612EBIT 14,776 13,805 15,560 17,851Growth, % 22 ‐7 13 15Margin, % 11.2 11.0 11.6 12.5Interest paid ‐2,507 ‐2,488 ‐2,549 ‐2,590Other Non‐Operating Income 371 351 377 402Non‐recurring Items ‐1,722 0 0 0Pre‐tax profit 10,917 11,669 13,388 15,663Tax provided ‐3,721 ‐3,967 ‐4,552 ‐5,325Profit after tax 7,196 7,701 8,836 10,337Others (Minorities, Associates) 8 0 0 0Net Profit 7,205 7,701 8,836 10,337Growth, % 20 ‐14 15 17Net Profit (adjusted) 8,927 7,701 8,836 10,337Unadj. shares (m) 293 293 293 293Wtd avg shares (m) 293 293 293 293 Balance Sheet Y/E Mar, Rsmn FY19 FY20e FY21e FY22eCash & bank 1,593 1,813 3,254 11,887Marketable securities at cost 1 1 1 1Debtors 42,179 43,222 46,396 49,501Inventory 32,414 30,858 33,124 35,341Loans & advances 4,281 4,380 4,702 5,733Other current assets 7,061 6,665 7,155 4,767Total current assets 87,529 86,940 94,632 1,07,230Investments 2,007 2,007 2,007 2,007Gross fixed assets 25,186 30,702 33,237 35,231Less: Depreciation ‐12,174 ‐13,579 ‐15,099 ‐16,711Add: Capital WIP 1,756 700 300 300Net fixed assets 14,768 17,823 18,437 18,820Non‐current assets 1,431 1,431 1,431 1,431Total assets 1,05,739 1,08,206 1,16,512 1,29,492 Current liabilities 70,402 66,399 67,088 70,905Provisions 523 519 529 583Total current liabilities 70,925 66,918 67,617 71,488Non‐current liabilities 1,231 1,231 1,231 1,231Total liabilities 72,155 68,149 68,847 72,719Paid‐up capital 293 293 293 293Reserves & surplus 33,291 39,764 47,372 56,481Shareholders’ equity 33,584 40,057 47,664 56,773Total equity & liabilities 1,05,739 1,08,206 1,16,512 1,29,492 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rsmn FY19 FY20e FY21e FY22ePre‐tax profit 12,640 11,669 13,388 15,663Depreciation 1,138 1,404 1,520 1,612Chg in working capital ‐9,848 ‐1,186 ‐6,230 ‐93Total tax paid ‐3,687 ‐3,967 ‐4,552 ‐5,325Cash flow from operating activities 242 7,920 4,126 11,856Capital expenditure ‐2,372 ‐4,459 ‐2,135 ‐1,994Chg in investments 206 0 0 0Cash flow from investing activities ‐2,167 ‐4,459 ‐2,135 ‐1,994Free cash flow ‐1,924 3,460 1,991 9,861Debt raised/(repaid) 2,260 ‐2,012 678 0Dividend (incl. tax) 2,292 1,229 1,229 1,229Other financing activities ‐6,597 ‐2,457 ‐2,457 0Cash flow from financing activities ‐2,037 ‐3,241 ‐550 1,229Net chg in cash ‐3,961 220 1,441 11,090 Valuation Ratios

FY19 FY20e FY21e FY22ePer Share data EPS (INR) 24.6 26.3 30.2 35.3Growth, % 20.4 (13.7) 14.7 17.0Book NAV/share (INR) 114.8 136.9 163.0 194.1CEPS (INR) 40.3 31.1 35.4 40.9Return ratios Return on assets (%) 9.5 9.5 10.1 10.5Return on equity (%) 26.6 19.2 18.5 18.2Return on capital employed (%) 41.0 37.1 35.2 34.0Turnover ratios Asset turnover (x) 2.4 2.0 2.0 2.0Sales/Total assets (x) 1.3 1.2 1.2 1.2Sales/Net FA (x) 9.3 7.7 7.4 7.7Working capital/Sales (x) 0.1 0.1 0.2 0.2Receivable days 116.4 126.1 126.1 126.1Inventory days 89.5 90.0 90.0 90.0Payable days 118.1 118.1 110.0 110.0Working capital days 41.8 53.5 65.0 61.3Liquidity ratios Current ratio (x) 1.2 1.3 1.4 1.5Quick ratio (x) 0.8 0.8 0.9 1.0Interest cover (x) 5.9 5.5 6.1 6.9Dividend cover (x) (3.9) (7.5) (8.6) ‐Total debt/Equity (%) 88.0 68.7 59.2 50.5Net debt/Equity (%) 83.2 64.2 52.4 29.6Valuation PER (x) 12.5 14.4 12.6 10.8Price/Book (x) 3.3 2.8 2.3 2.0Yield (%) (2.1) (0.9) (0.9)EV/Net sales (x) 1.1 1.1 1.0 0.9EV/EBITDA (x) 8.7 9.0 8.0 6.6EV/EBIT (x) 9.4 9.9 8.7 7.2


Page | 63 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker‐dealer unregistered in the USA. PHILLIPCAP researchis prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a‐6 of the Securities Exchange Act of 1934 solely byRosenblatt Securities Inc, an SEC registered and FINRA‐member broker‐dealer.

Chambal Fertiliser Ltd (CHMB IN)

It’s all about Gadepan 3 INDIA | SECTOR | Initiating Coverage

4 September 2019

Gadepan 3 to drive value growth CHMB’s addition of the Gadepan 3 unit in January 2019 has added about 70% of its existing capacity. It is currently operating close to 100%, scaling up very quickly after commissioning in Q4FY19. CHMB has become the largest private producer with a total capacity of 3.35mn tonnes. The new capacity will be governed under the new investment policy having much better returns compared to older ones. By FY19‐22, we expect it to contribute 40‐45% of its existing revenue – which comes from trading and Gadepan 1 and 2. Leadership position in key markets will lead to higher market share CHMB is the largest private urea producer in India with about 8% market share and without considering import volume it is the 5th largest producer in India after major public sector companies (NFL/RCF) and co‐operatives (IFFCO/Kribhco). It holds a leadership position in key consuming states such as Rajasthan, Haryana, Punjab, Chhattisgarh, and Madhya Pradesh. Overall, it has a presence in ten states that have a total urea demand of about 21mn tonnes of which 16mn tonnes are fulfilled via domestic production, and the rest through imports. This provides a significant opportunity for CHMB to sell additional volumes from Gadepan 3, using its existing marketing and sales distribution set up. Fully depreciated and no‐debt status of Gadepan 1 and 2 offer better returns Gadepan 1 and 2 have already completed 25 and 19 years of operations against normal life of 15 years as per industry standards and company policy, and are operating smoothly with regular maintenance capex. Both units are fully depreciated and do not have any long‐term debt, providing significant opportunity for CHMB to generate better returns. We estimate that a 1% saving in energy consumption in existing urea plants (average of 5.37 Gcal/tonne for Gadepan 1 and 2 would lead to c.Rs 80mn savings in costs, supporting better margins. Enhanced market share in urea brings in larger cross‐selling opportunities With additional volumes of urea, CHMB will have better cross‐selling opportunities selling non‐urea and other agri‐inputs products in coming years. Urea remains a priority for farmers, and with CHMB’s strong market presence in key states with well‐established marketing networks, it can easily market its non‐urea products. Outlook and valuation CHMB is moving out of non‐core businesses and has successfully added Gadepan 3, which should lead to better revenue and margins by FY20‐22. We expect additional urea sales volumes to also support its trading business (non‐urea grades; DAP and NP/NPK/NPS), helping CHMB to expand its market share. We see revenue/EBITDA/PAT CAGR at 8%/14%/17% in FY19‐22, largely driven by Gadepan 3. Trading business is likely to see slower volume growth in FY20, and margins will be supported mainly by Gadepan 3. CHMB trades at 9.3x/8.4x our FY20/21 EV/EBITDA. Given its leadership in urea and efficient operational performance among listed peers, CHMB has historically traded at premium to RCF, NFL, GSFC, Zuari Agro, and Mangalore Chemicals. Its addition of the lucrative Gadepan 3 plant and opportunities for better trading are likely to drive growth in the visible future. As such, we assign a target EV/EBITDA multiple of 9x to Sept FY21 EBITDA (implying 9x Sept FY21 PE) and value CHMB at a target of Rs 200 and initiate coverage with a Buy rating.

BUY CMP RS 153 TARGET RS 200 (+31%) COMPANY DATA O/S SHARES (MN) : 416MARKET CAP (RSBN) : 64MARKET CAP (USDBN) : 0.952 ‐ WK HI/LO (RS) : 196 / 692LIQUIDITY 3M (USDMN) : 0.58PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Jun 19 Mar 19 Dec 18PROMOTERS : 58.7 58.5 58.4FII / NRI : 7.4 7.0 7.1FI / MF : 13.9 14.0 14.5NON PRO : 6.5 6.8 6.2PUBLIC & OTHERS : 13.6 13.7 13.4 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 5.4 ‐14.6 ‐4.6REL TO BSE 7.0 ‐5.7 ‐0.2 PRICE VS. SENSEX

KEY FINANCIALS Rsmn FY19 FY20E FY21ENet Sales 1,01,774 1,22,465 1,25,521EBIDTA 12,279 15,652 16,544Net Profit 7,875 7,736 8,398EPS, Rs 18.9 18.6 20.2PER, x 8.1 8.2 7.6EV/EBIDTA, x 12.2 9.3 8.4P/BV, x 2.2 1.8 1.5ROE, % 27.3 21.7 19.5Debt/Equity (%) 303 235 176


050100150200250300350400

Apr/16 Jan/17 Oct/17 Jul/18 Apr/19

Chambal BSE Sensex




CHAMBAL FERTILISER LTD INITIATING COVERAGE

About the company • Largest private urea producer in India. Currently manufactures urea and SSP; also

trades in agri inputs products such as DAP, MOP, NPS/NPK, agrochemicals, seeds and micronutrients.

• Promoted by Zuari Industries Ltd in 1985, a part of KK Birla Group. • First plant (Gadepan 1) is at Kota, Rajasthan; commissioned in 1993. Second

plant (Gadepan 2) was started in 1999. • Third‐largest fertiliser producer in India after IFFCO and NFL with a capacity of

close to 3.3mn tonnes after commissioning of Gadepan 3 urea plant in January 2019.

• Mainly caters to northern, central, and western regions. Marketing network of 1,700 dealers and c.20,000 village outlets.

• The entire portfolio of products are sold under the Uttam umbrella brand. • Urea manufacturing revenue: c.53%. SSP revenue is not significant; estimated at

Rs 500mn in FY18. Trading revenue: c.46%. Software revenue: c.1%. • It has sold off its non‐core businesses in the past few years (textile/shipping) to

focus on its core fertiliser business. CHMB’s evolution

Source: Company, DoF, Phillip capital India Research Manufacturing of urea and trading of fertiliser covers c.95% of revenue


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2019: – Gadepan III commissined

2012: – SSP plant Gadepan

1999: – Gadepan II commissioned1997: – IMACID JV

with OCP, Morocco

1985: – Aravali Fertilisers Limited incorporated1989: Aravali Fertilisers renamed to Chambal Fertilisers1993:– First urea plant commissioned in October– Listed on Stock Exchanges1994:– Gadepan I commercial production

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Location of urea plants, Kota, Rajasthan

Source: Google map, Phillip Capital India Research IMACID, Morocco: A strategic joint venture • Indo Maroc Phosphore S.A. (IMACID): Equal JV between Tata Chemicals, CHMB,

and OCP of Morocco. • The JV manufactures phosphoric acid in Morocco with a capacity of 0.43mn

tonnes. • Phosphoric acid (produced by OCP) is supplied to India at quarterly contract

prices. • IMACID’s FY19 revenue was at Rs 25bn; PAT: Rs 3.5 bn; CHMB’s share was Rs

1.1bn. • An increase in phosphoric acid prices should provide support to IMACID’s

earnings.

Railway sliding –loading of urea

Gadepan II

Gadepan I

Gadepan III



Investment rational Gadepan 3 urea plant to drive value growth With the commissioning of Gadepan 3 brownfield urea plant in January 2019, CHMB has become the largest private urea producer in India with a total capacity of 3.35mn tonnes at a single location – in Kota, Rajasthan. This unit has added about 70% of existing capacity and should drive value growth for CHMB. It will be governed under the new investment policy. CHMB became the 3rd largest urea player with Gadepan 3 CHMB's urea capacity is now at c.3.5mn tonnes

Source: DoF, Industry, Company, Phillip Capital India Research Capacity utilisation remains close to 100% or above since FY16

Source: Company, Phillip Capital India Research Gadepan 3’s revenue and margins are much better compared with existing plants We have estimated revenue based on delivered gas price of USD 13/mmbtu considering limited availability of domestic gas. CHMB will use a larger share of imported RLNG. We expect revenue of Rs 39bn for Gadepan 3 in FY20/21 each (contributing about 45‐50% to the existing business) in FY20/21 resulting in CHMB’s revenue/EBITDA/PAT CAGR at 8%/13%/17% in FY19‐22.

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Gadepan III Gadepan I Gadepan II

Gadepan 3 will contribute significant to profitability in FY19‐22

Gadepan 3 quickly reached 100% untilisation in Q2 FY20 after starting commercial operation in early 2019



Earnings estimates for Gadepan 3 Particulars FY19E FY20E FY21ECapacity (mn tonne) 1.34 1.34 1.34Production (mn tonne) 0.23 1.27 1.27Project Cost (Rsmn) 60,000 60,000 60,000Debt/equity 3.5:1 3.5:1 3.5:1Net sales (Rs mn) 9,703 38,927 38,927EBITDA (Rs mn) 1,121 8,814 8,822Source: Phillip Capital India Research, Rs mn Favourable policy to drive revenue and margin for Gadepan 3

Source: Phillip Capital India Research,*including trading Gadepan 3 to expand market share in both urea and non‐urea products CHMB’s existing market position in urea • Indian urea demand was c.31mn tonnes in FY19, which was covered by

production of c.24mn tonnes and imports of c.8mn tonnes. India met its import requirements through a tendering process by the government’s canalizing agencies and c.2 mn tonnes from OMIFCO – a JV of Kribhco and IFFCO in Oman.

• CHMB produced c.2.5mn tonnes in FY19 with a production share of 10% in India. The new capacity will expand its market share in FY20‐22, mainly replacing India’s imported volumes.

India’s urea’s consumption by imports and production

CHMB has c.8% market share in urea consumption

Source: DoF, Industry, PhillipCapital India Research, Based on FY18‐19

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West and north India regions drive major revenues for CHMB • Although, CHMB is the largest private player producer in India with about 8%

market share, it is the 5th largest producer in India after major public sector (NFL/RCF) and co‐operatives (IFFCO/Kribhco) without any imported volumes.

• It holds a leadership position in its key states including Rajasthan, Haryana, Punjab, Chhattisgarh and MP. Overall, it has a presence in ten states for urea sales and the five states listed below generate c.90% of CHMB’s sales.

o Rajasthan: 600,000 tonnes; leader with about one fourth market share o Uttar Pradesh: 460,000 tonnes o Haryana: 370,000 tonnes o Punjab:430,000 tonnes o Madhya Pradesh:400,000 tonnes

• In the 10 states that CHMB caters to, total demand is c.21mn tonnes, covered by a domestic production of 15.6mn tonnes and imports of 3.7mn tonnes.

• This provides significant opportunity for CHMB to sell additional volumes from Gadepan 3, based on its existing marketing and sales distribution set up (doesn’t need major marketing or sales promotion activities due to existing distribution strength).

CHMB's market share and position in each state

Source: Phillip Capital India Research, Industry, Based on FY18 CHMB's key states: Consumption is largely dependent on imported urea

Source: DoF, Industry, Phillip Capital India Research, Based on FY18

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Imported urea contributes about 20% to the markets CHMB covers, which offers better scope for market expansion

CHMB has major market share in Rajasthan, Punjab, Haryana, MP and Chhattisgarh for urea consumption



CHMB’s state‐wise market share expansion potential • CHMB’s home state – Rajasthan – was importing 400,000 tonnes of its total

requirement as of FY18; so there is a significant opportunity to offload 30‐35% of Gadepan 3’s volumes.

• UP is the largest consuming state for urea, with a demand‐supply gap of 1mn tonnes, presenting a good opportunity for CHMB.

• Bihar, Chhattisgarh, Uttarakhand, and J&K do not have urea capacities, so they should also be key markets for Gadepan 3 volumes, assuming CHMB’s strategy is to expand in existing markets.

• While the government is planning to build capacities via the revival mode in states that do not have urea facilities, new plants will take 2‐3 years to come up. By this time, overall demand will also rise – helping accommodate additional supply.

• We expect CHMB can easily expand to markets beyond its traditional ten states – mainly in Maharashtra, Gujarat, and some southern states, considering the strong market presence of its Uttam brand.

• We expect its market share to improve to about 11% from 8% currently, majorly through replacement of imported volumes, assuming that CHMB’s strategy is to leverage its existing marketing and distribution set up.

Some states where CHMB is present do not have urea plants – providing opportunity to increase market share

N:P:K ratio (north and west regions)

Source: DoF, Industry, Phillip Capital India Research Gadepan 3 will also support cross‐selling non‐urea and expansion of trading • We expect CHMB is likely to leverage additional volumes of urea to expand

trading volumes over the medium term for other non‐urea and agri inputs products.

• Urea remains a priority for farmers. CHMB produces urea in India (prefer by farmers) and has a well‐established brand – so it can easily market non‐urea products – mainly DAP, MOP, and other agri inputs such as agrochemicals and seeds.

• CHMB markets DAP comfortably in its existing market through cross selling, mainly against urea. It is the second largest DAP trader with imports of about 1mn tonnes in FY19. Presently, CHMB holds c.10% market share in DAP demand in India, despite no production facilities; it meets the entire requirement through imports.

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CHMB is close to high nitrogen (urea) consuming regions of north and west India where consumption is concentrated towards nitrogen mainly due to more nitrogen deficiency in the soil and low urea prices



CHMB has about 10% market share in DAP consumption in India

Source: Industry, DoF, Phillip Capital India Research, CHMB's MOP sales volumes are driven by UP and Bihar with a share of c.60%

Source: Industry, DoF, Phillip Capital India Research Gadepan 1 and 2 continue to drive consistent returns • CHMB’s Gadepan 1 and 2 were set up in 1993 and 1999 based on state‐of‐art

technology from Denmark, Italy, USA, and Japan. • Gadepan 1 and 2 have a capacity of 1mn tonnes each and normally operate

above 100% capacity utilisation in order to generate additional revenue as per the government policy (production beyond reassessed capacity of 1.73mn tonnes is compensated based on import parity price).

• Both plants have completed more than 15 years of operation and as per our analysis and government/industry standard (urea plant life is 15 years and 20 years as company policy) Gadepan 1 & 2 are fully depreciated and operating smoothly with a regular maintenance capex.

• This regular maintenance capex supports CHMB in gradually improving energy consumption at both plants, allowing it to improve margins, especially after the implementation of the New Urea Policy 2015 (subsidy is paid based energy norms for each plants). Energy consumption of below 5.5 Gcal/tonne (norms) for urea adds value to margins. As our estimates, 1% reduction in urea energy consumption in existing plants (an average of 5.37 Gcal/tonne for Gadepan 1 and (2) will reduce costs by c.Rs 80mn, leading to improvement in margins.

• Also, there is no major long‐term debt for existing units supporting profitability and generating consistent cash flows of CHMB.

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Bihar Uttar Pradesh Haryana Madhya Pradesh Others



Gadepan 1 and 2 capacity utilisation improved to above 100% since FY17

Source: Phillip Capital India Research, Company CHMB’s exit from non‐core segments to drive earning efficiency • CHMB exited its textile and shipping businesses considering weak long‐term

outlook and also to cover some of the funding requirements for Gadepan 3. • In 2004, Chambal entered into shipping business by acquiring India Steamship for

energy transportation with five ships but with the weak outlook for commodities markets, it gradually moved out of this and completely exited the business in FY17 (shipping revenue was Rs 9.2bn in FY16).

• CHMB also exited its textile business (revenue of Rs 4.1bn) in 2015 by selling to Sutlej Textile.

• Presently, it has only one non‐core business segment – software (development and business process outsourcing) whose revenue was Rs 800mn in FY18 with an EBIT loss of Rs 58mn.

• We believe exiting non‐core businesses (lower margins/loss‐making segments) should allow CHMB to focus on fertilisers and generate better margins.

• CHMB’s core business EBIT margins improved since FY16 with a gradual exit from non‐core businesses. We expect it to expand further in FY20/21 with the commissioning of Gadepan 3.

Exiting non‐core business is supporting better margins EBIT margins for core business are consistent and growing

Source: Company, Phillip Capital India Research, *Includes trading &phosphoric acid, **shipping, textile and

software

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Financial performance Gadepan 3 to remain a major revenue driver in FY20‐22 • We expect urea revenue CAGR at 14% in FY19‐22, largely driven by Gadepan 3.

Trading of fertiliser and other agri inputs segments is likely to see 1% CAGR; we expect higher inventories for non‐urea grades to pressure trading volumes in FY20.

• Lower MRPs and discount offers will keep pressure on trading realisations in FY20.

• Overall, we expect CHMB’s revenue CAGR at 8% in FY19‐22, with major contribution from the Gadepan‐3 urea plant. Also, the new plant’s revenue/cost is recognised in USD denomination, insulating CHMB’s financials from any volatility in currency.

Revenue growth to be largely driven by Gadepan 3 Segments (Rs bn) FY18 FY19 FY20E FY21E FY22E CAGR (FY19‐22) (%)Urea 40 62 88 88 89 12%Trading* 35 38 33 36 40 1% Others 1 1 1 1 1 2%Revenue 75 102 122 126 129 8%Source: Company, PhillipCapital India Research,*including non‐fertiliser trading of seeds and agrochemicals

High inventories to pressure margins in FY20, but Gadepan 3 to compensate • Higher inventories in non‐urea grades is likely to keep pressure on trading

margins, but better returns from Gadepan 3 will offset any negative impact on margin in FY20.

• EBITDA margin has consistently increased with CHMB’s exit from non‐core business segment. It was 7.5% in FY15 and touched12.1% in FY19. We expect it to remain steady with the incorporation of Gadepan‐3’s revenue in FY20 (12.8%) and improve in FY21 (13.2%).

• We haven’t factored in energy‐consumption savings benefit into our financials for FY19‐20; but CHMB is likely to continue reducing energy consumption (at minimum capex), which should improve its margins. Our analysis indicates that a 1% energy saving or reduction in consumption for Gadepan 1 and 2 in FY19‐21 will contribute an average Rs 300mn annually to EBITDA.

CHMB: Gadepan 3 to support revenue and margin growth in FY19P‐22

Source: Phillip Capital India Research, *Fertiliser & other agri inputs,

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Gadepan 3 has USD‐denominated revenue and cost, which fully covers currency risk. We estimate that the new plant contributed 10% of CHMB’s urea revenue in FY19P and will contribute 30% in FY20/21



Gadepan 3 keeping return ratios under pressure temporarily

Source: Phillip Capital India Research

Rs 60bn capex in Gadepan 3 from FY18 has deteriorated debt/equity temporarily

Source: Phillip Capital India Research, *Fertiliser & other agri inputs,

Valuation and outlook CHMB has moved out of non‐core businesses and is focusing on fertilisers. Gadepan 3 should contribute 40‐45% of its urea revenue, supporting margins in FY19‐22. This plant will generate revenue and book costs in USD, avoiding INR depreciation risk. We expect additional urea sales volumes from the new plant to support its trading business of non‐urea grades (DAP and NP/NPK/NPS) and lead to market share gains in existing CHMB states (north India) and even in new states. In FY20, a slowdown in demand led by erratic monsoon and high inventories will keep overall margins and growth in the trading business under pressure, which will be offset by high revenue/margins from Gadepan 3. Government initiatives to double farmers’ income in the coming years, including DBT, should support earning growth and reduce working capital requirements. Valuation We expect revenue/EBITDA/PAT CAGR of 8%/13%/17% in FY19‐22, largely driven Gadepan 3. Trading business is likely to see slower volume growth in FY20 and margins will be largely supported by Gadepan 3. CHMB trades at 9.3x/8.4x our FY20/21 EV/EBITDA. Given its leadership in urea and efficient operational performance amongst listed peers, CHMB has historically traded at premium to RCF, NFL, GSFC, Zuari Agro, and Mangalore Chemicals. Its addition of the lucrative Gadepan 3 plant and opportunities for better trading are likely to drive growth in the visible future. As such, we assign a target EV/EBITDA multiple of 8x to Sept FY21

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EBITDA (implying 9x Sept FY21 PE) and value CHMB at a target of Rs 200; initiate coverage with a Buy rating. PE band Ev/EBITDA band

Source: Phillip Capital India Research Key risks Downside • Higher inventories at various channels are likely to impact CHMB’s trading

margin of agri inputs (DAP and other complex grades). • Deficient rainfall (in key markets of CHMB such as Rajasthan, Punjab, Haryana,

UP and MP) should affect CRIN’s volumes and revenue growth. • Any delay in subsidy disbursement under DBT should increase working capital

requirements. • Negative policy changes for existing and new units will affect revenue and

margins. Upside • Appreciation of the INR against the USD should support Gadepan‐3 financials.

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Appendix New Investment Policy 2012 • Indian urea sector is controlled by the government based on defined policies. • There were 30 plants in India with a capacity of c.24.5mn tonnes. With CHMB’s

Gadepan 3 unit India’s capacity increased to c.26mn tonnes. • The new plants of Matix Fertilisers, CHMB’s Gadepan 3 and upcoming revival

units – Ramagundam, Sindri, Baurani, and Talcher – will be covered under the New Investment Policy 2012, notified in January 2013.

• The policy was introduced to encourage investment in the sector as there was no new capacity addition for more than a decade.

• In the previous policy announcement, government included a clause of “guaranteed buyback” in case of excess production but removed the clause in October 2014 – this reduced the number of interests coming in from companies.

• However, CHMB and Matix Fertiliser were among the companies that were keen on setting up additional capacity considering better returns than the existing policy.

Key highlights • Provides floor and ceiling prices (realisation) payable to urea plants based on

delivered gas prices. • These prices are based on Imported Parity Price (IPP) which will be recognised at

85% for revamped plants, 90% for brownfield, and 95% for greenfield projects. • Any increase in delivered gas prices will increase floor and ceiling prices by USD

2/tonne (brownfield/greenfield). Highlights of the New Investment Policy for urea Description Revamp Expansion/ Brownfield Greenfield Delivered gas price in USD/mmbtu 7.5 6.5 6.5 Floor price of urea 245 285 305 Ceiling price of urea 255 310 335 Gas price escalation by USD 0.1/mmbtu IPP recognized at 85% 90% 95% Delivered gas price escalation by USD 0.1/mmbtu Delivered gas price up to USD14/mmbtu Increase in floor/ceiling price

by USD 2.2/tonne Increase in floor/ceiling price by USD 2/tonne

Increase in floor/ceiling price by USD 2/tonne

Delivered gas price above USD14/mmbtu Increase in floor price by USD 2.2/tonne

Increase in floor price by USD 2/tonne

Increase in floor price by USD 2/tonne

In case delivered gas price crosses USD14/mmbtu plant will be paid only floor price Source: DoF, Industry, PhillipCapital India Research Our analysis on the new investment policy • The pricing structure of the new plants provides a pass‐through of gas prices

(cost). Realisations are also linked towards international prices of urea. Therefore, price and cost are linked and tend to generate consistent operating margin.

• Any saving in other costs, lowering energy consumption, interest and depreciation will lead to improvement in margins and profitability.

• The new policy assumes minimum ROE of c.12% (based on certain assumptions including project cost of Rs 60bn and debt/equity of 2:1).

• The new policy is more transparent and reimburses higher gas prices with an increase in floor and ceiling prices.

• Revenue and raw materials cost are both determined in USD, which allows perfect hedging.

• The policy was introduced to reduce India’s urea import dependency. With the government’s plans to add 5 new urea plants – and with the commissioning of CHMB and Matix Fertiliser’s urea plants, India’s imports will reduce substantially in coming years.



Financials

Income Statement Y/E Mar, Rsmn FY19 FY20e FY21e FY22eNet sales 1,01,774 1,22,465 1,25,521 1,29,259Growth, % 35 20 2 3Total income 1,01,774 1,22,465 1,25,521 1,29,259Raw material expenses ‐60,818 ‐70,079 ‐71,676 ‐73,531Employee expenses ‐1,665 ‐1,837 ‐1,883 ‐1,939Other Operating expenses ‐27,012 ‐34,897 ‐35,418 ‐35,759EBITDA (Core) 12,279 15,652 16,544 18,030Growth, % 54.2 27.5 5.7 9.0 Margin, % 12.1 12.8 13.2 13.9 Depreciation ‐1,441 ‐3,607 ‐3,671 ‐3,744EBIT 10,838 12,045 12,874 14,286Growth, % 52 11 7 11Margin, % 11 10 10 11Interest paid ‐2,525 ‐2,127 ‐1,982 ‐1,718Other Non‐Operating Income 828 1,225 1,255 1,293Non‐recurring Items ‐1,973 0 0 0Pre‐tax profit 8,334 11,471 12,474 14,189Tax provided ‐2,486 ‐3,789 ‐4,130 ‐4,713Profit after tax 5,848 7,682 8,344 9,476Others (Minorities, Associates) 54 54 54 54Net Profit 5,902 7,736 8,398 9,530Growth, % 59 ‐2 9 13Net Profit (adj) 7,875 7,736 8,398 9,530Unadj. shares (m) 416 416 416 416Wtd avg shares (m) 416 416 416 416 Balance Sheet Y/E Mar, Rsmn FY19 FY20e FY21e FY22eCash & bank 811 903 343 5,136Debtors 48,274 47,595 45,140 37,868Inventory 13,231 19,514 22,570 18,934Other current assets 2,734 2,734 2,734 2,734Total current assets 65,050 70,746 70,786 64,672Investments 2,757 2,757 2,757 2,757Gross fixed assets 71,597 72,684 74,137 75,620Less: Depreciation ‐3,151 ‐6,758 ‐10,428 ‐14,172Add: Capital WIP 1,086 1,086 1,086 1,086Net fixed assets 69,533 67,012 64,796 62,534Non‐current assets 1,110 1,110 1,110 1,110Total assets 1,39,261 1,42,436 1,40,259 1,31,884 Current liabilities 64,916 65,308 61,687 50,735Provisions 412 412 412 412Total current liabilities 65,328 65,720 62,099 51,148Non‐current liabilities 46,080 42,080 36,080 30,080Total liabilities 1,11,408 1,07,800 98,179 81,228Paid‐up capital 4,162 4,162 4,162 4,162Reserves & surplus 24,670 31,453 38,898 47,229Shareholders’ equity 27,853 34,635 42,080 50,411Total equity & liabilities 1,39,261 1,42,436 1,40,259 1,31,884 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rsmn FY19 FY20e FY21e FY22ePre‐tax profit 9,140 11,143 12,146 13,861Depreciation 1,441 3,607 3,671 3,744Chg in working capital ‐12,041 ‐5,471 ‐2,426 ‐44Total tax paid ‐2,920 ‐3,789 ‐4,130 ‐4,713Cash flow from operating activities ‐4,379 5,490 9,261 12,848Capital expenditure ‐18,025 ‐1,086 ‐1,454 ‐1,483Chg in investments ‐686 0 0 0Cash flow from investing activities ‐17,545 ‐759 ‐1,126 ‐1,155Free cash flow ‐21,924 4,732 8,135 11,693Debt raised/(repaid) 26,109 ‐3,740 ‐7,796 ‐6,000Other financing activities ‐4,098 ‐953 ‐953 ‐953Cash flow from financing activities 21,958 ‐4,639 ‐8,696 ‐6,899Net chg in cash 34 93 ‐560 4,794 Valuation Ratios

FY19 FY20e FY21e FY22ePer Share data EPS Adj (INR) 18.9 18.6 20.2 22.9Growth, % 59.0 ‐1.8 8.6 13.5Book NAV/share (INR) 69.3 85.6 103.5 123.5CEPS (INR) 22.4 27.3 29.0 31.9Return ratios Return on assets (%) 7.2 7.0 7.3 8.2 Return on equity (%) 27.3 21.7 19.5 18.5 Return on capital employed (%) 16.0 18.0 18.7 20.0 Turnover ratios Asset turnover (x) 1.0 1.1 1.1 1.2 Sales/Total assets (x) 0.9 0.9 0.9 0.9 Sales/Net FA (x) 1.7 1.8 1.9 2.0 Working capital/Sales (x) (0.0) 0.0 0.1 0.1 Receivable days 173.1 141.9 131.3 106.9 Inventory days 47.5 58.2 65.6 53.5 Payable days 40.3 34.0 30.5 24.6 Working capital days (3.6) 12.5 24.5 23.9 Liquidity ratios Current ratio (x) 1.0 1.1 1.1 1.3 Quick ratio (x) 0.8 0.8 0.8 0.9 Interest cover (x) 4.3 5.7 6.5 8.3 Total debt/Equity (%) 302.8 234.6 176.0 121.4 Net debt/Equity (%) 300.0 232.1 175.2 111.4 Valuation PER (x) 8.1 8.2 7.6 6.7Price/Book (x) 2.2 1.8 1.5 1.2EV/Net sales (x) 1.5 1.2 1.1 0.9EV/EBITDA (x) 12.2 9.3 8.4 6.7EV/EBIT (x) 13.9 12.1 10.8 8.5



APPENDIX Types of fertilisers: Explaining N, P, and K • Chemical fertilisers are usually classified according to their principal elements –

namely Nitrogen (N), Phosphorous (P) and Potassium (K). • A large chunk (about 90% by some estimates) of fertilisers is applied as solids. • Some commonly used fertilisers:

o Urea: Most widely used. Usually in granular form. Sometimes mixed with ammonium nitrate and dissolved in water. Delivers one of the highest amounts of nitrogen at 46%.

o Ammonium Nitrate: Typically granular. Provides 33% nitrogen. o Ammonium sulphate: By‐product derived from the waste generated by coke

ovens. Provides 21% nitrogen. o Others include Calcium Nitrate, Di‐ammonium Phosphate, Mono‐ammonium

phosphate, Triple Super Phosphate, Potassium Nitrate, and Potassium Chloride.

In the pages that follow, we have discussed the three types of fertilisers in detail, especially in the Indian context Nitrogen‐based fertilisers Urea dominates global consumption, but its consumption is flagging • Nitrogen‐based fertiliser demand CAGR was c.3% over the past five decades,

driven by crops productivity, larger awareness among farmers, traditional usage (it being a primary source of plant nutrients, especially urea), and green revolutions. Urea dominates demand within the nitrogen nutrient category, with its share increasing to 48% in 2017 (169mn tonnes) from about 20% in early 1970, largely driven by easy availability, low prices, and farmers’ affordability.

• Demand for other products (grades) in the nitrogen category didn’t change significantly over the past decades, as ammonia (for direct application), ammonium nitrate (AN), ammonium sulphate, and calcium ammonium nitrates (CAN) are available largely as by products. These products are used for specific crops and different countries use them based on availability and government regulations. For example, India has imposed stricter regulations for the use AN as a fertiliser such that data (volumes of production, sales and inventories at every stage of distribution) is recorded, mainly to avoid misuse of the compound for illegal usage (such as making explosives).

• Usage of urea has remained stable and is expected to grow at a slower pace than non‐urea grades – with changes in cropping pattern, more balanced nutrient requirements, and improvement in crop yields and quality of crops.

Urea covers half of the world’s fertiliser consumption

Source: IFA, Phillip Capital India Research,*Direct application, AP‐Ammonium Phosphate, CY17

Ammonia*, 4%

AS, 3%

Urea, 48%

AN, 6%

CAN, 3%

Nitrogen solutions, 5%

AP, 7%

NPK Compound, 18% Others, 5%

Urea is an inexpensive form of nitrogen fertilizer with an NPK (nitrogen‐phosphorus‐potassium) ratio of 46‐0‐0



Farmers slowly move towards using phosphate and potassium‐based products • Since the early 1990s, many developed and developing countries have been

promoting the balanced usage of fertilisers (push for using phosphate and potassium based products), managing soil health, and environmental impact of over‐usage of nitrogen fertilisers – especially urea. As a result, the share of the N compound (phosphate and potassium‐based products with nitrogen as a nutrient) has rapidly increased.

• The usage of NP and NPK has increased to about 30% currently from about 15% in early 1990s – indicating that farmers are moving towards balanced usage as availability increases.

Use of nitrogen‐based P&K fertilisers are continually rising

Source: IFA, Phillip Capital India Research China’s green initiative will have limited impact on the Indian fertiliser market • China dominates global nitrogen consumption at c.25%, followed by India at

16%. However, the dragon’s share is continuously falling since 2013 as its government targets zero chemical fertiliser consumption growth by 2020.

• China’s major provinces introduced MSP over a decade ago to encourage domestic production. However, it removed market support price (MSP) for corn and cotton in order to reduce inventories and encourage farmers to diversify into other crops. In 2018, China reduced wheat MSP by about 3% and is planning to reduce it for rice too. The policy was largely to reduce huge pile of inventories and gradually align domestic prices towards international prices.

East Asia (mainly, China) is dragging world urea consumption

Source: IFA, PhillipCapital India Research, in nutrient tonnes

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

‐

10

20

30

40

50

60

70

80

90

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

mn tonn

es

RoW

W Europe

L America

N America

S Asia

E Asia

East Asia (mainly China)’s urea consumption is gradually falling due to its zero‐growth policy



China to see production cuts… • Global production of urea is dominated by east Asia with a share of c.40% or

90mn tonnes (mainly china) in 2017. • China’s green policies have depressed supply since 2016. The international

Fertiliser Association expects more reduction in supply by 2022; sees net production from east Asia falling to 85mn tonnes.

• Out of China’s total urea production, 60‐65% is driven by coal (anthracite and bituminous coal) as feedstock; most other countries including India use natural gas.

• Shutdowns have been driven by tighter environmental regulations and higher operating costs due to increase in cost of production (rise in coal prices) and limited options for refinancing.

• According to our interaction with international experts, China has already shutdown about 18mn tonnes of urea capacity over the past 2‐3 years on green initiatives, mainly the high‐polluting units (largely coal based); it is expected that the country will see further shutdowns of 10‐12mn tonnes of supply over the next five years. Net capacity reduction is expected to be around 2‐3mn tonnes by 2022‐23.

• Also, demand and supply balance in steel and natural gas industries plays an important role for production cost of urea producers in China, as coal/natural gas are key raw materials. The government’s drive for a greener China had also affected many coal mines (shutdowns) due to pollution, which have raised the cost of production for many urea companies due to limited availability of quality coal.

• For China, the winter diversion of natural gas for household consumption (October to March) also affects urea production and raises the cost of production.

China holds about 40% of global urea capacity

Source: IFA, Phillip Capital India Research, in nutrient tonnes ….which could be largely compensated by new plants in South Asia These new plants are coming up in India, Indonesia, Africa (Egypt and Nigeria), Russia, North America (Canada), and West Asia (Iran). The net additional supply is expected by IFA is about 22mn tonnes (including technical urea) by 2022 to touch a total of about 226mn tonnes – a 1% CAGR on 2017’s base. The peculiar history and status of urea in India In FY19, India was the second largest consumer of urea globally at 20% share or 31mn tonnes. Consumption CAGR over the past 25 years was 3.2% while that of non‐urea grades was 2.8%. Government’s support for urea (c.70% of MRP or Rs 266 per bag) in terms of subsidy has limited the growth of non‐urea grades. Historically, urea

‐

20

40

60

80

100

120

140

160

mn tonn

es

Oceania

W & C Europe

America

Africa

E Europe & C Asia

W Asia

S Asia

E Asia



remains a key fertiliser for farmers as it is a cheaper (by about 5x) source of nitrogen and its result are visible within a few days vs. non‐urea products. Monsoons do not affect urea consumption much in India In the past 25 years, rainfall deficiency has had little impact on urea consumption in India, except in drought‐like situations (below normal rainfall) in 2002/2009. However, consumption of non‐urea products (DAP, SSP, MOP and NP/NPK/NPS) is sensitive to rainfall. In times of lower rainfall, farmers reduce cost of cultivation by buying cheaper product such as urea. The impact of erratic rainfall on urea demand is limited

Source: Ministry of agriculture, DoF, IMD, PhillipCapital India Research Urea prices haven’t changed in India for the past two decades Urea MRP is currently sold at Rs 5,922 per tonne for a 45‐kg bag – not changed much for the past two decades. Conversely, prices of non‐urea products such as DAP and MOP have seen prices increasing by 4x and 5x. The key reason for this anomaly is the government’s NBS policy in 2010 under which prices of non‐urea products were given fixed subsidy and MRPs were freed. Government left urea out of the NBS policy, which created an imbalance in usage. In times of poor rainfall, to reduce cost of cultivation, farmers chose to consume urea in large volumes. Urea price remains more or less stagnant over the past two decades

Source: DoF, companies, Industry, PhillipCapital India Research

10

15

20

25

30

35

70

80

90

100

110

120

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Consum

ption (m

n tonn

es)

Rainfall as % of LPA

Rainfall Urea Non‐urea

Normal rainfall range

‐

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Rs/ton

ne

MRP

Urea DAP MOP



Uttar Pradesh constitutes c.20% of India’s urea demand

Source: DoF, Phillip Capital India Research Co‐operatives (IFFCO/Kribhco) and RCF/NFL have c.55% market share

Source: DoF, Industry, PhillipCapital India Research, for FY18 Neem‐coating may reduce over‐usage to an extent • The government’s initiative to compulsory produce and import ‘neem’‐coated

prilled urea (the objective was to curb illegal usage and diversion to the industrial segment such as for melamine, plywood, etc.) may reduce some consumption in the coming years.

• The government has allowed companies to charge 5% extra for neem‐coating on MRP of Rs 5,360 per tonne.

• So far, the result of both these initiatives is not visible in terms of lower total consumption.

India set to fill the urea demand‐supply gap by FY23 India’s urea demand‐supply gap started to increase from FY05 and touched c.7mn tonnes in FY16 – which was met through imports. However, there was no fresh investment in any greenfield urea project for more a decade, considering conservative policies and lower margins due to delay in subsidies. To rectify this, the government’s ambitious aim is to revive old units under ‘Make in India’ and reduce import dependency – this has attracted a few companies.

‐

1

2

3

4

5

6

7

mn tonn

es

IFFCO/Kribhco32%

NFL13%

RCF8%Nagarjuna Fert

7%

Chambal7%

GNFC2%

GSFC2%

MCFL2%

Madras Fert2%

Zuari1%

Sriram1%

Others23% IFFCO/Kribhco

NFL

RCF

Nagarjuna Fert

Chambal

GNFC

GSFC

MCFL

Madras Fert

Zuari

Sriram

Others



Urea demand‐supply (capacity) gap to be filled by FY23

Source: DoF, Industry, Phillip Capital India Research The proposed 5 units under the government’s revival drive All will use natural gas as feedstock except Talcher, which will use coal, based on Chinese technology – this is a first after coal‐based plants were shut down a few decades ago Plants Company Old capacity

(mn tonnes) New capacity (mn tonnes)

Feedstock Gas source Estimated timeline

Target market

Sindri State: Jharkhand

Hindustan Urvarak and Rasayan Ltd (HURL), a joint venture of NTPC, Coal India, IOCL and FCIL.

0.3 1.27 Gas Jagdishpur‐Haldia & Bokaro‐Dhamra Natural Gas Pipeline (JHBDPL)

FY20 North and East

Gorakhpur State: Uttar Pradesh



FY21 North and East

Barauni State: Bihar



FY21 North and East

Ramagundam State: Telangana

Ramagundam Fertilizers & Chemicals Ltd, a joint venture of NFL and EIL with FCIL

0.5 1.27 Gas Mallavaram‐Bhopal‐ Bhilwara‐Vijaipur Natural Gas Pipeline (MBBVPL)

FY20 South and East

Talcher State: Odisha

Talcher Fertilizers Ltd, a JV of RCF, GAIL and Coal India with FCIL.

0.5 1.27 Coal Mahanadi Coalfields Ltd (MCL)

FY23 North and East

Source: DoF, Industry, PhillipCapital India Research

Demand and supply gap in revival units’ states

Source: DoF, Industry, Phillip Capital India Research, *average sales of 5yr in mn tonne

‐

5

10

15

20

25

30

35

40

FY91

FY93

FY95

FY97

FY99

FY01

FY03

FY05

FY07

FY09

FY11

FY13

FY15

FY17

FY19e

FY21e

FY23e

mn tonn

e

Production Supply Demand

‐ 2 4 6 8

Gorakhpur (UP)

Sindri (Jharkhand)

Baurani (Bihar)

Talcher (Odisha)

Ramagundam (Telegana)

mn tonn

es

Existing supply in state

Demand*

Proposed capacities will have one fourth share; Telangana, Odisha, Jharkhand, and Bihar to get urea capacity to cover existing demand

• The revival of old units aims to cover demand‐supply mismatch in India’s eastern region and boost infrastructure investment

• About 90% of urea supply is concentrated in north (c.40%) and west (c.50%) regions. So the government spends large amount of subsidy as freight costs to east and south India

• There are no urea plants in Odisha, Bihar, Telegana, and Jharkhand and the entire demand (c.4mn tonnes of product) is met via north and west capacity



Addition of 7 urea units will bring in c.9mn tonnes of capacity by FY23 in India

Source: DoF, Industry, Phillip Capital India Research What will happen to urea prices ahead? • While it is possible that India’s revival units change world trade dynamics in

coming years (higher supply could reduce international urea prices) what is more probable, according to experts, is that higher Indian capacity will offset the supply cuts due to Chinese shutdowns.

• World Bank expects urea prices to see a gradual increase, along with crops prices.

India and Brazil constitute c.25% of world urea imports

Source: IFA, Phillip Capital India Research, in nutrient tonne

0

1

2

3

4

5

IFFCO

Kribhco

Kribhco S

GNFC

GSFC

NFL

RCF

HURL(Sindri)

RFCL(NFL/EIL/FCIL)

TFL(RC

F/GAIL/CIL)

HURL(Gorakhp

ur)

HURL(Barauni)

BVFC

MFL

Cham

bal Fert

Nagarjuna

Fert

Matix

Yara India

Grasim

Kanp

ur Fert

SPIC

Zuari

Shriram

MCFL

Urea capacity

Co‐operative/stateowned 8 mn

tonnes

Public ~13 mn tonnes Private ~11 mn tonnes

‐

10

20

30

40

50

60

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

mn tonn

es

Others

W Europe

N America

E Asia

S Asia

L America

India is the world’s largest importer of urea with c.12% share in 2017 vs. 20% in 2014



India’s high domestic production has slowed its urea imports in the last three years

Source: DoF, Phillip Capital India Research, Import by source (tender and Oman India Fertiliser Company) Global urea and crop prices are strongly correlated

Source: Bloomberg, Phillip Capital Research India,*Rice, corn, wheat, soya Global urea and crop prices to gradually recover

Source: World Bank, Phillip Capital India Research

**Europe, *Based on price forecast of corm, soya, rice, wheat

‐

1

2

3

4

5

6

7

8

2013‐14 2014‐15 2015‐16 2016‐17 2017‐18

mn tonn

es

India urea imports Tenders OMIFCO

‐

100

200

300

400

500

600

‐

35

70

105

140

175

210

Urea price (USD

/ton

nes)

Crop

inde

x

Crop prices vs urea Crop index* Urea

50

70

90

110

130

125

175

225

275

325

2015 2016 2017 2018e 2019e 2020e 2021e 2025e 2030e

Crop

inde

x

Urea USD

/ton

nes

Urea** Crop Index*



Phosphate‐based fertilisers Phosphate‐based fertiliser demand to outstrip nitrogen‐based • World phosphate consumption is about 45mn tonnes (P205) driven by

ammonium phosphate grades (DAP/MAP) covering about 50% of the demand in 2016, followed by NPK compound with a share of about 25%. Single Super Phosphate (SSP), Triple Super Phosphate (TSP) and direct application of phosphate rock have a share of about 15%.

• India is the second largest consumer of phosphate with a share of 15% in 2016 or about 7mn tonnes P205.

• The phosphate consumption pattern across the globe varies in terms of grade usages. For example, the Brazilian market is driven by MAP compared to DAP in India, while Bangladesh consumes TSP. This variation is mainly due to cropping patterns, availability of finished goods and raw materials, price and cost advantages, and government policies.

India (c.15% of total global) is the second largest consumer of phosphate fertiliser

Source: IFA, PhillipCapital India Research, mn tonnes (P205) Growth in P and K consumption to overtake N by 2023 The world’s consumption of phosphate (in P205) and potassium (K20) based fertilisers has grown at 2% each over the past half century to 105mn tonnes in 2016 (vs. nitrogen (N) at +3%). The International Fertiliser Association expects nitrogen consumption to see 1% CAGR while phosphate (P) and potassium (K) to see higher CAGRs of 1.5% and 1.8% by 2023, based on assumptions of improvement in nitrogen management and an approach towards balanced fertiliser usage in China and India. Phosphate and potassium to see better growth in coming years

Source: IFA, Phillip Capital India Research

0%

5%

10%

15%

20%

25%

30%

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4

6

8

10

12

14

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20

40

60

80

100

120

mn tonn

es nutrie

nt

N P K

In India, other than urea, DAP has been a traditional product (especially in northand west regions) and the farmers’ first preference over other NP/NPK/NPS grades

World’s nitrogen‐based fertiliser consumption to reduce gradually with rising share of phosphate‐and potassium



In India, DAP is a preferred choice for phosphates • DAP and NP/NPS/NPK cover c.35% of fertiliser consumption in India with a

demand of c.16mn tonnes. • Historically, farmers have a preference towards DAP, especially in the northern

region (where phosphate as a soil nutrient is lacking). • Farmers typically buy fertilisers based on traditional patterns or

recommendations of friends or family members. Therefore, consumption patterns of DAP and other grades vary across states. Other important factors for consumption of various grades are rainfall, pricing, and cropping pattern. Urea always remains a preferred fertiliser due to lower price; SSP consumption increases with rise in DAP and other complex grades.

• Over the past 3‐4 years, farmers’ buying patterns are changing, albeit slowly, towards balanced nutrients, and educated farmers are taking decisions based on cost of cultivation, cropping patterns, and soil quality. We expect changes in cropping pattern and increasing awareness towards balanced usage to drive high consumption of non‐DAP grades and products.

DAP is leading fertiliser grades in non‐urea demand with a share of c.50%

Source: DoF, Industry, Phillip Capital India Research UP dominates DAP consumption with about one‐fourth share

Source: DoF, Industry, PhillipCapital India Research, mn tonne

‐

2

4

6

8

10

12

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

mn tonn

es

DAP NP/NPK/NPS* SSP

‐

0.50

1.00

1.50

2.00

2.50



IFFCO, IPL, and Chambal Fertiliser have c.60% of DAP market share

Source: DoF, Industry, PhillipCapital India Research, FY18 20‐20‐0‐13 is the dominant grade with consumption share of c.45%

Source: DoF, Industry, Phillip Capital India Research, *including 20‐20‐0 Maharashtra covers about one fourth NP/NPK/NPS consumption

Source: DoF, Industry, PhillipCapital India Research, FY18

IFFCO23%

IPL13%

Chambal Fert10%PPL

8%

GSFC7%

Coromandel Int7%

Mosaic6%

Zuari5%

Greenstar4%

Kribhco4%

Others13%

‐

2

4

6

8

10

12

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

mn tonn

es

Others 15.15.15 12.32.16 10.26.26 20.20.0.13*

‐

0.50

1.00

1.50

2.00

2.50

mn tonn

es Maharashtra, Karnataka, Telangana, AP cover c.60% of NP/NPK/NPS grades demand



Coromandel is the leader in NP/NPK/NPS sales

Source: DoF, Industry, PhillipCapital India Research, FY18 Maharashtra covers about c.25% share in SSP consumption

Source: DoF, Industry, PhillipCapital India Research, FY18, mn tonnes High inventories for non‐urea products will affect consumption • High inventories remain a major concerns for agro‐input products, but in India,

this is an important issue for phosphatic fertilisers (DAP and other grades) compared to urea, due to the low prices.

• The entire agro inputs industry suffered in 2016 and 2017 when companies had to offers larger discounts on MRPs despite rising production cost due to rise in raw material prices and lower domestic demand.

• Inventories have slowly piled up over the past few quarters with rising imports, delayed monsoon, and domestic production of urea and non‐urea grades.

• The gap between requirement and availability has substantially increased since January 2019 and remains at close to 4mn tonnes as of June 2019. However, the gap reduced by July with substantial recovery of monsoon in August to about 0.1mn tonnes.

• We expect companies’ sales volumes will be marginally impacted as kharif requirement is already covered. We should see recovery in H2FY20 with better rabi season demand.

CIL25%

IFFCO21%

FACT9%

GSFC9%

PPL6%

Smartchem6%

RCF5%

Zuari5%

GFL4%

IRC Agro*3%

Others8%

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Maharashtra, MP and Rajasthan are top‐3 consuming states for SSP with c.50% market share

Coromandel and IFFCO are leading companies with c.45% market share in NP/NPK/NPS grades



Availability remains much higher for DAP and complex grades

Source: Industry, DoF, Phillip Capital India Research China’s phosphate supply slowdown to be replaced by Middle East and Africa • World phosphate supply is largely dominated by East Asia, mainly China, with

merchant grade phosphoric acid consumption of about 19mn tonnes P205 or about 40% in 2016.

• East Asia’s, mainly China’s, consumption of phosphoric acid (major raw material to produce phosphate fertilisers) has grown by 10mn tonnes over a decade, and this increase was offset by a shutdown of capacities in North and Latin America (USA and Brazil) and West Europe.

• China’s consumption of phosphate fertilisers (largely DAP, MAP and TSP) has declined by 20% over the past five years. The major reasons for this decline were stricter government regulations, depletion in the quality of phosphate rock, and regulation towards deployment of phosphogypsum (by‐product for producing phosphoric acid).

• China phosphate capacities also declined by 2% in the past three years on the country’s green initiatives; we see a further net decline of 2‐4mn tonnes by 2023, mainly from incompetent plants (highly polluted units). We expect this decline to be replaced Morocco (OCP) and Saudi Arabia (Maa’den) – as both have gradually increased their capacities.

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Inventory hangover to remain a major concern for the fertiliser companies in FY20. A recovery in monsoon in coming months should support sales volumes



China is consuming close to 40% of phosphoric acid

Source: IFA, Phillip Capital India Research Phosphoric acid is the key raw material for phosphate fertiliser. In terms of the world’s phosphoric acid capacity, East Asia (China) holds major share at c.23mn tonnes P205 in 2016, which is likely to remain stagnant in the medium term. Effect of China’s green initiatives on phosphate producers • China’s commitment towards a greener economy has changed the fundamentals

of supplies from that country, largely for the chemicals industry. • Inspections for the fertiliser sector started in mid‐2016 and lasted for about one

and half years, resulting in the temporary closure of many chemicals plants, mines, and fines for many companies.

• In early 2018, China introduced a new environmental tax (replacing environmental fees, which had many loopholes). The new tax aims to target gas emissions, water/noise pollutions, etc., and is charged by the regional government at different rates.

• This has resulted in some cost increases for Chinese fertiliser producers – 1‐3% – according to industry experts.

• The Yangtze River clean‐up also affected the operations of fertiliser and chemical companies.

• Hubei province has banned chemicals production within a 1‐km radius around the river by 2020, creating a lot of confusion and raising concerns for the industry. Many phosphate producers have been affected in the province, as the river is also used for transportation of raw materials and finished products.

Raw material supply and cost of production • Phosphate rock production has declined in major mines, resulting in increasing

cost of production for DAP and other grades. • Phosphoric acid supply cuts by China and from North America are expected to be

offset by Middle East (Maa’den) and Africa (OCP). • The International Fertiliser Association expects a net addition in phosphoric acid

capacity of about 1mn tonnes on supply cuts, especially by small and medium sized companies. African company OCP, the world’s largest phosphoric acid exporter, is set to expand capacity (P205) by 3mn tonnes by 2022. Capacity additions of c.0.2mn tonnes (P205) in Saudi Arabia by Ma’aden also help to overcome China’s supply cuts.

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Phosphoric acid capacity expansion is shifting towards Africa (OCP)

Source: IFA, Phillip Capital India Research Morocco has c.70% of the world’s phosphate rock reserves

Source: World Bank, Phillip Capital India Research, in bn tonne India’s phosphoric acid imports

Source: DoF, companies, Industry, Phillip Capital India Research

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The replacement of Chinese capacity by Africa and Middle East will support Indian sourcing, as Africa (OCP) remains a major supplier to India

OCP (Africa), the largest phosphate rock miner, will expand its mining areas – which should help India to have better raw materials availability and finished product if there is a global short supply due to the China factor

India’s phosphoric acid imports are dominated by OCP (Morocco), JPMC (Jordan), and Senegal (ICS)



India’s phosphate rock imports

Source: DoF, companies, Industry, Phillip Capital Research Backward integrated companies are better placed • A few phosphate fertiliser plants in India are integrated (also produce phosphoric

acid) such as Coromandel’s Ennore and Vizag, Paradeep Phosphate’s Paradeep, and IFFCO’s plant at Paradeep.

• Majority of producers of DAP/NP/NPK/NPS in India largely rely on imported phosphoric acid except for some companies such as Coromandel, GSFC, IFFCO and Paradeep Phosphate, RCF and Greenstar that cover a part of the requirement through captive production.

• Hindalco (Birla Copper, a unit of Hindalco) is the lowest cost producer of DAP as it covers 100% requirement from captive production. Sulphuric acid is generated as by product from copper smelters. It is used internally by Hindalco to produce phosphoric acid (by importing phosphate rock) and the finished product – DAP (by importing ammonia).

• The government’s recent announcement to free fertiliser exports is considered a good opportunity for Hindalco to fulfil some of the demand from nearby countries such as Bangladesh, Sri Lanka, Nepal, and some South Asian countries.

Natural gas and phosphoric acid are the major raw materials for fertilisers in India


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India’s phosphate rock imports are also dominated by OCP (Morocco), JPMC (Jordan), and Senegal (ICS)

Raw materials for making phosphate fertilisers include phosphate rock, phosphoric acid, sulphur, ammonia and sulphuric acid



DAP/NP/NPK/NPS capacity in India

Source: DoF, Industry, Phillip Capital India Research, *Bar in Maroon indicate plant with captive phosphoric acid

capacity DAP production Producers consider making DAP or other grades partly based on demand, but largely on margins. Normally, companies prefer to produce NP/NPK/NPS grades because they yield better margins than DAP. IFFCO is the largest producer of DAP and other grades in India with 15% of total capacity, followed by Coromandel and Paradeep Phosphate. NP/NPS/NPK production

Source: DoF, Industry, Phillip Capital India Research, Production is 12 months rolling avg

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IFFCO (Kandla), Coromandel (Kakinada) and PPL has c.60% of DAP/NP/NPK/NPS capacity in India

A sharp increase in phosphoric acid prompts producers to focus on NP/NPK/NPS grades over DAP. They do this to earn better margins because for lower‐nutrient‐content products the raw‐material requirement is also lower. This trend was clearly visible in FY18 and FY19 – when the consumption requirement of DAP was compensated through imports

High phosphoric acid price has increased NP/NPS/NPK production in recent months compared to DAP



Potassium‐based fertilisers World potash supply Globally, potash consumption is dominated by East Asia, mainly China, at c.35% of the world’s share in 2017. Potash is a market oligopoly – Canada, Russia, Belarus, Israel, and Jordan hold a major share of potash ore reserves. Suppliers from these countries export large volumes to countries with major demand – such as India, China, and Brazil. Canada, Belarus and Russia have c.50% of the world’s potash reserve

Source: nrcan.gc.ca, Phillip Capital India Research Indian potash demand • 70% is driven by direct application of MOP (Muriate of Potash); 30% comes from

NPK consumption, which is increasing gradually over the past decade. • India’s MOP imports were about 4.2mn tonnes in FY19, rising steadily from

FY13’s level of 2.5mn tonnes. • Potash is largely consumed in crops such as grains, fruits, vegetable, sugarcane,

and floriculture. • Major consuming states are Maharashtra, UP, West Bengal, AP, and Tamil Nadu

(these covering c.50% of India’s demand for direct application). • India’s MOP imports are dominated by Indian Potash (IPL) with a share of about

45‐50%; this company negotiates contract prices for India and sets the annual price. IPL generally imports on behalf of IFFCO, who is the largest producer of NPK fertilisers.

Maharashtra dominates potash consumption with a c.15% share

Source: DoF, Industry, Phillip Capital India Research, FY18

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Indian Potash is the leading importer in India with 45‐50% share

Source: DoF, Industry, Phillip Capital India Research Potash (MOP) for direct application has a share of c.70%

Source: DoF, Industry, Phillip Capital India Research Indian potash import and contract prices

Source: DoF, Industry, DoF, Phillip Capital India Research

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Potash imports have gradually increased with a fall in Indian contract prices over the past few years



India Map with fertiliser companies’ plant location and gas pipelines


AGROCHEMICALS

A structural opportunity for Indian Industry


AGROCHEMICALS SECTOR UPDATE

Agrochemicals Sector

Global overview: Long‐term outlook is promising Long‐term growth will be driven by India, Brazil, Argentina, Germany and USA • The global agrochemical market has seen a CAGR of c.3% over the past decade to

touch c.US$ 58bn in CY18, backed by increasing yields and crop production. • The sector has seen slow growth during CY11‐15 and since then, seen a recovery

– with an increasing growth rate. • The world agrochemicals market is likely to reach c.US$ 64bn by 2022 or a CAGR

of c.3% in CY2017‐22, according to estimates by Sumitomo Chemicals. • Fungicide sales CAGR at 5.1% over CY07‐17 were higher than other products,

which saw CAGRs of 2.7‐3.5%. World pesticides market is dominated by herbicides

Source: Bloomberg, Industry, PhillipCapital India Research Country wise insights • World’s top‐5 markets: Brazil, USA, China, Japan, and Argentina contributed

about 50% or c.US$ 29bn of the global agrochemical market 2017. • 2012‐17 CAGR: India 6.7%, USA 3.6%, China 1.4%, and Argentina 3.1% have seen

growth whereas Brazil ‐3%, Japan ‐5.6%, and France ‐1.9% declined – according to Sumitomo Chemicals/AgbioCrop.

• Crop protection market is expected to touch c.US$64bn, c.3% CAGR, from c.US$55‐56bn in 2017. As per Sumitomo’s estimates, growth will be largely driven by major markets such as Brazil, India, Argentina, USA, and China at CAGRs of 1‐4%. However, we believe China’s policy of zero growth consumption will restrict expansion in its agrochemicals market.

• We expect, Latin America (Brazil), Europe and Asia (India) to drive higher growth in the long term.

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Herbicides Insecticides Fungicides

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World agrochemical market by country

Source: Sumitomo Chemicals, PhillipCapital India Research Share of herbicides and insecticides is stable, fungicides has increased The product mix of the global crop‐protection market hasn’t changed much over the past decade. Herbicides continue to dominate the market with a share of 46% in 2017 vs. 48% in 2006. In the same period, insecticide’s share declined marginally to 25% vs. 26% while the share of fungicide products increased to 27% from 22%. 2006 – World product mix share 2017 ‐ World product mix share

Source: Bloomberg, PhillipCapital India Research Fruits, vegetables, and cereal crops dominate agrochemical usage Fruit and vegetable crops are major users of crop protection products globally at c.33% share in 2017 vs. 29% in 2006; growth was mainly driven by high production and change in dietary pattern over the past decade (according to Bloomberg data). The other major crops are soybean, rice, corn, and cotton covering c.34% of pesticide consumption in 2017 (with no change in consumption pattern in the past decade), followed by oilseeds/canola, and sugar beet.

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India

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2017 2022

Herbicides47%

Insecticides26%

Fungicides22%

Others5%

Herbicides47%

Insecticides25%

Fungicides27%

Others1%



World pesticide consumption by major crops: Fruits and vegetables dominate

Source: Company, PhillipCapital India Research World regional insight on usage by crops and product categories The world agrochemical market is dominated by the Far East, North America, and Latin America – with a share c.70% (US$ 36bn) in 2016, compared with c.65% share in 2006. The combined CAGR of Latin America, East Europe, and Far East was 6‐10% over the past decade vs. 2‐5% for West Europe, North America, and RoW. World agrochemical market is dominated by Far East, North and Latin America

Source: Bloomberg, PhillipCapital India Research Far East • Far East region (mainly China, India, Japan and Korea) is the largest market with a

c.6% CAGR of in the past decade – with growth mainly driven by China and India. This region has seen subdued growth over the past 2‐3 years driven by limited growth in China, but improvement in other countries such as India is expected in coming years

• Herbicides products dominate with a share of c.38% in 2016 and no changes in consumption patterns. Insecticide share fell over to about 32% in 2006 from 36% in 2016; it was mainly replaced by fungicides, whose share increased to c.28% from 24%.

• Fruits and vegetables dominate the usage of agrochemicals, contributing to 40% of total market size in 2016. Other corp‐consuming pesticides include soybean, rice, corn, and cotton.

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

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Far East: Product mix Far East: Usage by crops

Source: Bloomberg, PhillipCapital India Research Latin America • Latin America (mainly Brazil and Argentina) is the second largest region after Far

East for agrochemicals, with a c.8% CAGR over 2006‐16. A slowdown in the global market, with higher inventories and crop prices, has affected its growth over the last 2‐3 years. Growth is expected to recover with increasing farm income in coming years.

• In product mix, herbicides have a large share at c.43% in 2016 or US$ 5bn. Insecticides consumption declined marginally to c.25% from c.26% over 2006‐16, but the share of fungicides marginally increased to c.27% vs. c.25%, replacing herbicides and insecticides.

• Fruits and vegetables continue to dominate pesticides usage, with c.33% share in 2016. Other major crops for agrochemicals usage are soybean, rice and corn with a share of c.20% or US$ 2bn.

Latin America: Product mix Latin America: Usage by crops

Source: Bloomberg, PhillipCapital India Research North America • North American market had seen a CAGR of c.2% over 2006‐16, slower than Far

East and Latin American market. It has seen declining growth over the past 2‐3 years, just like other regions.

• Herbicides products are dominant with about c.67% share in 2016 or c.US$ 7bn, mainly due to large farming practices compared to India’s much smaller ones. Share of fungicides increased marginally to c.14% in 2016 compared to c.10% in 2006, replacing some share in insecticides and herbicides.

• Corn, soybean, and fruits/vegetables are major contributors for agrochemicals usage with a share of c.60% in 2016.

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North America: Product mix North America: Usage by crops

Source: Bloomberg, PhillipCapital India Research West Europe • This agrochemicals market had a CAGR of c.3% in 2006‐16 in line with overall

slowdown in the global agrochemicals market. • Agrochemicals usage is high in insecticides and herbicides products or with a

combined share of c.80% in 2016. However insecticides share has gradually increased over the past decade by replacing the herbicides category. Corn, soybean, cereals, and fruits/vegetables are major crops for usage of agrochemicals in western Europe.

West Europe: Product mix West Europe: Usage by crops

Source: Bloomberg, PhillipCapital India Research East Europe • The eastern Europe market saw a CAGR of c.10% in 2006‐16, much higher than

other regions, as it started with a low base in 2006. • East Europe market is dominated by herbicide products usage with a share of

c.70% in 2016. Higher growth in the agrochemicals market over the past decade was largely contributed by herbicides usage.

• Cereals, cotton, corn, and fruits/vegetables are major crops using agrochemicals in the region.

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East Europe: Product mix East Europe: Usage by crops

Source: Bloomberg, PhillipCapital India Research World trade focussed on India, China, Brazil, Germany and the USA World trade in agrochemicals increased by 3x to US$ 30bn in the last 15 years, with increasing agriculture production and yields amid rising contribution to exports of agrochemicals from developing countries because of their low‐cost manufacturing advantages. The focus has turned towards Brazil, China, USA, and India. Exports: Combined agrochemicals exports market share of Germany, USA, China, India and France was close to 50% in CY00, which improved to about 55% in CY16 with increasing competition from largely generic markets such as India and China. In fact, China and India were able to expand exports market share, replacing the USA and European countries. Imports: World’s imports of agrochemicals was largely fragmented since 1961, but outsourcing to low‐cost manufacturing countries by innovating countries, along with emergence of demand in countries such as Brazil and India, supported overall global import trends. Combined import share of top five countries – Brazil, France, Germany, Canada and USA – in CY00 was close to 30%, which improved marginally to about 32% in CY16 with the expansion in the global market. Higher share was majorly contributed by Brazil and Germany in these top‐five countries, by replacing France, Canada and USA. In the same period, India’s share of the world’s imports also increased to c.US$ 1bn in CY16 from just c.US$ 50mn in CY00. Germany leads in agrochemicals export followed by China

Source: UN, PhillipCapital India Research

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Germany



Market share of exporting countries

Source: UN, PhillipCapital India Research Top‐10 agrochemicals importers (market value) Top 10 agrochemicals importers (market share)

Source: UN, PhillipCapital India Research Rising product development costs and competition led to global consolidation • Regulatory standards and requirements to develop new products have increased

over the years. • Focus has largely changed towards development and efficiency – resulting in

higher R&D expenditure for innovators as developed countries have turned their attention towards managing human health and environment. A recent example –RoundUp (Glyphosate – Herbicides), a popular product of Bayer (product of Monsanto; became part of Bayer’s portfolio after acquisition) is facing a legal battle across the world as it has been accused of causing cancer in users.

• The industry is seeing increasing competition from low‐cost generic players. Countries such as Europe, USA, China, India and Brazil have been gradually adopting stringent regulatory requirements over the past few years, which has resulted in increasing product development costs by 2x – to c.US$ 286mn in 2014 vs. what it was in 1995.

• Product development cost and complexity also increased the time taken for product development – to c.11 years in early 2010s from 8 years in 1995.

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Product development costs and time has increased substantially since the 1990s

Source: Croplife, PhillipCapital India Research Focus on bio‐pesticides and better efficiency has reduced number of new AIs (active ingredients) • The rate of new‐product approvals has reduced over the past two decades with

rising cost of investment or innovations. • The number of active ingredients has mainly fallen because of improved product

efficiency and increasing focus on biologicals (largely bio‐pesticides) compared to conventional product offerings.

• Also, safety and environment regulations have withdrawn or banned many AIs over the past few decades.

Number of new AIs introduced per decade is declining

Source: Phillips McDougall, PhillipCapital India Research New area of growth ‐ The rise of the biological products market • According to Phillips Mc Dougall, a UK‐based research and consulting company,

there are about 300 bio‐pesticide active substances and organisms, including natural substances, products from fermentation, microbes, and pheromones.

• In recent years, interest of innovators, generic players, and many other SMEs is gradually increasing towards biological products, mainly due to (1) limited regulatory requirements, and (2) rising interest from farmers towards these products because of growing ‘integrated pest management’.

• Bio‐pesticide sales have grown almost 30x since the early 1990s to about US$ 3bn with a share of about 6% in the global crop‐protection market.

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The crop‐production sector has grown 5.5x since 1960s with about 600 active ingredients available to farmers across various categories



Bio‐pesticide sales and share in world’s crop‐protection market

Source: Phillips McDougall, PhillipCapital India Research Improved product efficiency has reduced application rates Continuous investment by the industry over the decades has increased the effectiveness and efficiency of products. This has significantly reduced the application rates for crop protection products across categories. For example, application rates for herbicides were about 2.4 kg/ha in 1950s, which reduced to about 100 gm/ha in 2010s. Active ingredient application rates has fallen substantially in seven decades

Source: Phillips McDougall, PhillipCapital India Research

0%

1%

2%

3%

4%

5%

6%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1993 1999 2005 2009 2012 2014 2016

Biop

esticides sh

are %

Sales in $b

n

Sales Share

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1950s 1960s 1970s 1980s 1990s 2000s

Kg/ha

Herbicides Insecticides Fungicides



China: Greener China will create opportunities for India • China is the world’s largest pesticides exporting country with a capability to

produce +600 technical products; +2,200 pesticides producers. • Largest supplier in pesticides driven by favourable climate conditions, domestic

availability of feedstock, government support for companies in terms of lower taxes and limited focus on environmental and safety norms (in the past).

China’s green initiative is affecting growth • The Chinese government aims to have zero growth in fertilisers and pesticides by

2020, and implementing stricter regulations, mainly to eliminate highly toxic products and upgrade product structure; this has affected production since 2015.

• Fire and explosions in March at the Tianjiayi Jiangsu Chemical Plant, at Yancheng on China’s eastern coast, led to the government hardening its stance on protecting the environment.

China pesticide output Pesticide consumption declined over 10% since 2015

Source: China Pesticide Association, PhillipCapital India Research China’s exports affected due to its green policy • China’s pesticide exports are largely distributed towards Asia and Latin America

(60% combined share or c.US$ 4.5bn in CY18). • USA, Brazil, and India are major countries for China’s technical product exports

while Brazil, Australia, and its key formulations exports market is South Asian countries.

• Glyphosate (herbicides), Paraquat (herbicides), and Imidacloprid (insecticides) are the top‐3 technicals products exports by China.

• China’s exports to India were valued at c.US$ 14mn with major contribution from insecticides technicals products.

China's pesticide exports share was focused on Asia and Latin America in 2018

Source: China Pesticide Association, PhillipCapital India Research

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(mn tonn

es)

0.81

0.84

0.87

0.90

0.93

0.96

2014 2015 2016 2017

(mn tonn

es)

31%

26%10%

17%

11%5%

Asia

Latin America

Africa

North America

Europe

Oceania

China’s green initiatives will create opportunities for Indian companies

China’s green initiatives have also created uncertainty for most countries that are largely dependent on Chinese supply



China’s export share in formulations and technicals for key countries Countries Formulation export share % Countries Technical export share % Brazil 8 USA 19

Australia 7 Brazil 13 Thailand 6 India 7 Indonesia 5 Australia 6 Vietnam 5 Argentina 6 USA 4 Vietnam 4

Argentina 4 Indonesia 3 Nigeria 4 Belgium 3 Ghana 3 Pakistan 2 Ukraine 3 Russia 2

Source: China Pesticide Association, PhillipCapital India Research Top‐10 active ingredients exported to India by China in CY18

Source: China Pesticide Association, PhillipCapital India Innovators will shift to India from China • Innovators tend to focus on reliability, quality, and assurance in order to

outsource manufacturing. Presently, the Chinese chemicals industry is speeding up the process of following regulations, despite the large scale of inspections, leading to many shutdowns of fertiliser and pesticides plants over the past 2‐3 years.

• Due to this, innovators are expected to gradually reduce their dependency on China for outsourcing and shift to countries such as India, which can provide skilled manpower, R&D capabilities, and low‐cost manufacturing.

• Incidentally, China is the largest producer of pesticide in the world with a share of about 80%, which has seen a falling trend over the past few years because of its green initiatives. This should provide significant opportunity to more reliable and R&D‐focussed markets such as India.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

US$ mn



China and India production share in the world consumption

Source: China Pesticide Association, PhillipCapital India We believe that over the medium to long term, Indian companies with better infrastructure, manufacturing capability, skilled manpower, and R&D exposure – are likely to benefit. Companies such as PI Industries, Rallis India, Coromandel International and Insecticide India will take advantage of China’s ongoing green initiative.

0%

4%

8%

12%

16%

20%

0%

10%

20%

30%

40%

50%

60%

70%

2012 2013 2014 2015 2016 2017 2018

India's share

China's share

China India



The Indian agrochemicals market • India’s domestic agrochemicals industry is estimated at US$ 2.5bn in 2017 with

exports of about US$ 2.4bn, making the total crop protection market c.US$ 4.9bn.

• Domestic market should see 6%+ CAGR to touch US$ 3.4bn by 2022 from 2017, driven by doubling of farmers’ income, increasing awareness and usage, limited farmland availability, and higher labour cost.

• India was the fifth‐largest exporter of agrochemicals in 2017 after China, Germany, USA and France.

• Indian exports CAGR was 9% over the past decade and is likely to reach c.US$ 3.3bn as per the industry estimates (FICCI and Agbiocrop) considering growth in generic markets.

Indian agrochemicals market

Source: FICCI, Agbiocrop, Industry, PhillipCapital India Research India’s pesticides consumption is dominated by insecticides with c.50% share • The Indian market is dominated by insecticides with +c.50% share in FY16,

herbicides at c.25%, fungicides c.20%. • Herbicides consumption has been growing over the past few years with changes

in weather conditions (more warmer), increasing labour costs, and rising cultivation of rice, soybean, and wheat crops.

• Share of fungicides is also rising, albeit not as fast as herbicides, with increasing cropping areas of rice, fruits, and vegetables.

• The usage of bio‐pesticides is growing at a slower pace, but is likely to garner a larger share over the long term, with increasing environmental awareness among farmers making them willing to cut down their usage of chemicals‐based pesticides, and with government support.

• State‐wise consumption: In terms of sales volumes, Maharashtra, UP, and Punjab have +50% share. Other major consuming states are Haryana and Telangana at 14%. In terms of agrochemicals sales value Andhra Pradesh, Maharashtra and Punjab are the major consuming states with about 50% share.

2.5 3.4

2.4

2.9

0

1

2

3

4

5

6

7

2017 2018e 2019e 2020e 2021e 2022e

US$ bn

Export Domestic



India ‐ Product category share

Source: FICCI, DAGRI, Industry, PhillipCapital India Research

State‐wise consumption of pesticide by volumes

Source: Ministry of agri, PhillipCapital India Research

State‐wise consumption share by agrochemicals value

Source: FICCI, PhillipCapital India Research, estimated in FY15

Opportunities for the Indian agrochemicals sector Generic players are expected to benefit the most in coming years • Innovators still hold a larger share of the crop‐protection market at 70% globally

while generic players hold the rest. Within the off‐patent market, share of patent products is only c.20% while generic companies hold the rest (as per Phillip McDougall).

• Out of the generic crop‐protection market, c.25% is controlled by innovators. This means there are opportunities for generic companies to garner market share from innovators with their inherent advantages such as low prices and costs, and larger distribution networks.

• The generic market has expanded rapidly over the past one and half decades; its share has increased to c.67% by 2016 from c.33% in 2006.

• Over few years, higher R&D costs have led to lesser AIs being introduced, which has affected innovators’ ability to expand market share. This has created consolidation in the global crop‐protection industry with more and more M&As of which major ones were Dow‐Dupont, Bayer‐Monsanto, and Syngenta‐ChemChina.

0%

20%

40%

60%

80%

100%

FY09 FY14 FY16

Others

Fungicides

Herbicides

Insecticides

0%

20%

40%

60%

80%

100%


Others

Telangana

Haryana

Punjab

UP

Maharashtra

24%

13%

11%

8%

7%

7%5% 5% 5%

15%

AP

Maharashtra

Punjab

MP/Chhattisgarh

Karnataka

Gujarat

TN

Haryana

West Bengal

Others



Major companies’ market position in crop protection industry

Source: UPL, PhillipCapital India Research, Revenue CY 16, CY17, Note: Syngenta/Adama owned by ChemChina,

Monsanto by Bayer, Arysta by UPL. Indian generic companies becoming competitive through better product offerings • Indian companies are expanding their distribution networks, creating brands,

innovating process technology for post patent molecules, developing better product mix (more combination products, eco‐friendly formulations), becoming aggressive about registering post‐patent products, and developing relationship with distributors to push volumes at more competitive prices than innovators.

• Indian farmers are more sensitive towards prices than the ones in other countries; therefore, lower‐price products offered by generic companies with a wide distribution network are better placed.

Market share of products

Source: UPL, Phillip McDougall PhillipCapital India Research • Indian generic players are also expected to gain from molecules going off‐patent

(from innovators) in the coming years. Products worth c.US$ 4.1bn are scheduled to go off‐patent by 2020, creating significant exports opportunities for Indian generic companies.

• The proprietary off‐patent market remains a big opportunity (c.US$ 9bn in 2016); it is currently held by innovators.

0

2

4

6

8

10

12

14

16

Dow‐Dup

ont

Syngen

taBa

yer

BASF

FMC

Mon

santo

Adam

aUPL

Nufarm

Sumito

mo

Platform

Albaugh

Redsun

Sipcam ISK

Wynca

Nihon

Mitsui Che

mAm

vac

Kumaiai

Gow

anNiss

anNippo

nHo

kko

Belchim

Rotam

Helm

Rallis

Sino

nKyotu Ag

ri

Revenu

e in US$ bn Innovators

Post Patent R&D Focussed Small & Medium

‐

20

40

60

80

100

2000 2005 2010 2011 2013 2014 2015 2016

Patent Proprietary off‐patent Post‐patent



AIs becoming off‐patent by 2022 Nos Investor company Active Ingredient Category 1 BASF Metrafenone Fungicide 2 BASF Saflufenacil Herbicide 3 BASF Topramezone Herbicide 4 Bayer CropScience Fluopicolide Fungicide 5 Bayer CropScience Isotianil Fungicide 6 Bayer CropScience Penflufen Fungicide 7 Bayer CropScience Pyrasulfotole Herbicide 8 Bayer CropScience Tembotrione Herbicide 9 Bayer CropScience Thiencarbazone Herbicide 10 Bayer CropScience Cyrposulfamide Safener 11 Dongbu Hannong Chemicals Metamifop Herbicide 12 Dow AgroSciences Aminopyralid Herbicide 13 Dow AgroSciences Pyroxsulam Herbicide 14 DuPont Chlorantriniliprole Insecticide 15 Ihara Chemical Pyrimsulfan Herbicide 16 Isagro Valifenalate Fungicide 17 Isagro Orthosulfamuron Herbicide 18 Kumiai Chemical Pyroxasulfone Herbicide 19 LG Chem Investment Flucetosulfuron Herbicide 20 Nihon Nohyaku Flubendiamide Insecticide 21 Nihon Nohyaku Pyrifluquinazon Insecticide 22 Nissan Chemicals Amisulbrom Fungicide 23 Sumitomo Chemical Fenpyrazamine Fungicide 24 Sumitomo Chemical Metofluthrin Insecticide 25 Syngenta Mandipropamid Fungicide 26 Syngenta Pinoxaden Herbicide

Source: Agropages, PhillipCapital India Research Export are pushing the growth of Indian agrochemicals • India’s advantage of low‐cost production is driving outsourcing and demand for

products as companies are leveraging quality R&D infrastructure with skilled manpower.

• Indian exports have been growing across the globe with a presence in North and Latin America, Europe, Africa and APAC countries.

• Farmers are selecting low‐priced products (rather than innovators’) products because of lower crop prices, increasing cost of cultivation, and high costs of agriculture inputs.

• Major advantages for Indian agrochemicals: 1. Pricing benefits and R&D strength, especially for off‐patented and generic

products. 2. Exports incentives. 3. High‐priced products offered by innovators are not in the ‘affordable range’

for farmers, while the ones offered by generic companies are – this creates better opportunities for exports.

• Exports of major Indian companies have grown 4x in the past decade to touch c.Rs 215bn in FY19.

• These companies are in the spot light with China’s uncertain supply and innovators’ preference for stable partners (suppliers).

• PI Industries and others are already benefiting – CSM exports are up 9x in a decade and 1.6x in the last five years – due to stronger relationships with innovators, suppliers gaining confidence of assured supply from India (considering China’s uncertainty), better R&D capabilities, skilled manpower, and low‐cost manufacturing.



Revenue: Exports revenue is consistently growing for major Indian companies

Source: Companies, PhillipCapital India Research,*Revenues of major companies. Failing global agrochemicals oligopoly remains a strong opportunity for India • Globally, about 70% of the agro‐chem market share is held by just four

companies vs. six earlier who held 80% market share – the present major ones are Dow‐Dupont, Bayer‐Monsanto, Syngenta‐ChemChina, and BASF. These innovators determine the technological shift for the industry.

• Offshore activity has shifted towards low‐cost countries in agrochemicals (like it did for other industries such as IT, manufacturing, and pharmaceuticals).

• Consolidation of the global industry provides good opportunities for India for offshore activities, as innovation rates are adversely affected by higher R&D costs to develop new molecules and tighter regulations.

How the oligopoly has played out…

Source: PhillipCapital India Research, Philip McDougall

‐

50

100

150

200

250

300

350

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

in Rs b

n

Export Domestic

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%



Long‐term demand drivers for agrochemicals Rising labour cost and shortage to create demand for pesticides Indian farmers have largely small farm holdings and therefore usage of pesticides, mainly weedicides/herbicides, is low, as farmers prefer using labourers to remove weeds from fields. Average land‐holding is c.1 hectare and small and marginal farmers constitute c.85% of total land holdings in India. Therefore, labour cost is an important part of operating cost of cultivation, covering average c.75%. On an average, labour cost is about 50% of operating cost of cultivation for paddy (West Bengal is about 65%). The cost is similar in wheat, maize, cotton, and sugarcane at 35%, 50%, 50% and 60% respectively. However, over the past few decades, most agri‐related workers are shifting towards urban areas (cities) to earn better income or are moving towards other activities such as infrastructure, creating shortages in the fields. The impact is clearly visible in rising average daily wages of labourers in rural areas – these have increased by almost 3.5x in a decade. Rising labour costs and shortages are expected to encourage farmers to use more pesticides (herbicides) to reduce overall costs. Higher consumption of herbicides is visible in FY09‐16; their share increased from c.17% to c.25% in this period.

Avg. daily wage rates of labourers in agriculture operations Agriculture workers are one‐third of the rural population

Source: Ministry of agriculture, PhillipCapital India Research Labour cost as % of operating cost of cultivation

Source: Ministry of agriculture, PhillipCapital India Research,*cost of cultivation FY15

0

50

100

150

200

250

300

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Rs

Male Female

‐

50

100

150

200

250

300

‐

200

400

600

800

1,000

1,200

1,400

1951 1961 1971 1981 1991 2001 2011

Agri workers

in m

n

PopulationRural populationAgri workers

0%

10%

20%

30%

40%

50%

60%

70%

80%

AP

Tamil Nadu

UP

Punjab MP

W Ben

gal

Punjab

Rajasthan

MP

UP

Bihar

AP

Bihar

Rajasthan

Haryana AP

Gujarat AP UP

Maharashtra

Tamilnadu

Paddy Wheat Maize Cotton Sugarcane

Lower consumption of pesticides, crop loses, climate change, and high labour costs remain long‐term demand drivers for agrochemicals in India



Changing crop cultivation and food consumption pattern leading to better usage Harvested areas for fruits and vegetables have grown much higher over the past one decade compared to other crops; they are expected to remain higher over the long term, with rising standard of living and people becoming more health conscious. This will lead to more demand of herbicides and fungicides (which is the trend globally). Crop‐wise area harvested

Source: FAO, PhillipCapital India Research Climate change to also support pesticide demand According to a study conducted by University of Washington, global warming is expected to accelerate the rate of crop losses due to insects. Warmer temperatures increases the metabolic and reproductive rates of insects exponentially, with some exception in the tropics. Therefore, more insects will eat more crops. According to the study, a 2° Celsius rise in mean temperature results in yield losses due to insects of 31% for corn, 19% for rice, and 46% for wheat. This is likely to create opportunities for more pesticide consumption, where companies will need to innovate with better product mix and protect the environment. Annual average temperature in India

Source: MOSPI, PhillipCapital India Research, in Celsius India’s pesticide usage is less than the world average India’s pesticide usage is just about 300gm/ha, much lower than the world average of about 4kg. Countries such as Bangladesh have seen a larger increase in usage to about 13x over the past three decades – to about 1.7kg/ha, although much lower than the world average in terms of usage. China, Japan, Italy, Argentina, and Brazil remain major users of pesticides per hectare. Lower consumption in India hampers yield due to crop losses. An expected rise in farmers’ income should lead to more usage of pesticides, helping to generate more yield and production.

‐

50

100

150

200

250

300

350

400

450

500

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Inde

x 1961=100

Vegetables Fruits CerealsWheat Rice CottonMaize

28

29

30

31

32

1901

1905

1909

1913

1917

1921

1925

1929

1933

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

2013

2017

in Celsiu

s



Pesticide consumption per hectare in India is lowest amongst leading agri‐based countries

Source: UN, PhillipCapital India Research Government to enable farmers’ inclination to consume agri inputs Agriculture is an important part of the Indian economy, contributing c.14% of GDP and employing half of the country’s population. The growth prospects of agriculture determine the future of many industries, directly or indirectly dependant on it. Farmers distress over the past few years due to crop losses, over production, and realisations that were below the cost of cultivation, have forced the state and central governments to take immediate and long‐term steps to address concerns. Some of the initiatives taken by the government over the past few years include projects under irrigation and promoting micro irrigation, crop‐insurance schemes, electronic market, soil health cards, direct transfer of subsidies, and increasing agriculture credit facilities. These initiatives are aimed at doubling farmers’ income in coming years (2022), which will lead to improving their inclination to consume agriculture inputs. Agriculture credit

Source: Ministry of Agriculture, Industry, PhillipCapital India Research

0

2

4

6

8

10

12

14

16

18

Kg/ha

China

Japan

Argentina

Brazil

France

USA

Bangladesh

India

‐

2,000

4,000

6,000

8,000

10,000

12,000


Rs billion

Others Commercial Banks Regional Rural Banks Co‐op Banks



Government initiatives to drive farmers’ income Major government initiatives Expected impact Crop insurance schemes Will benefit farmers by securing the crop‐loss risk and improving

confidence for more sowing Focus on irrigation and micro irrigation

It will support farmers in planting multiple crops and reducing dependency on the monsoon season

Soil health cards Higher penetration will support the government in providing better advice to farmers on the balanced usage of agri inputs.

Agriculture credit Funding towards agriculture has increased substantially, specifically over the past three years

Trading platform (e‐NAM) Linking of mandis across the country will facilitate farmers in selling crop produce at better prices. The government is aiming to link 22,000 mandis by 2022 from current 585 mandis.

Source: PhillipCapital India Research, Ministry of Agriculture The government’s initiative to provide income support under the Pradhan Mantri KIsan Samman Nidhi (PM‐KISAN) with an amount of Rs 6,000 per year to all farmers (about 150mn farmers) will strengthen their procurement ability for agri inputs. The amount will be directly transferred to farmers’ bank accounts. In the interim budget, the scheme was restricted to small and marginal farmers. Top‐10 state‐wise number of farmers with agri inputs demand share

Source: Industry, Ministry of Agriculture, PhillipCapital India Research, demand share by volumes

0%

5%

10%

15%

20%

25%

30%

35%

40%

‐

5

10

15

20

25

30

UP

Bihar

Maharashtra MP AP

Kerala TN

Karnataka

W Ben

gal

Telangana

Others

Fert/Agche

m dem

and share

Nos of farmers in m

illion

Nos of farmersFert demand share*Crop protection demand share*



Key risks and concerns for the industry Higher dependency on monsoon Only 50% of land in India is irrigated, making sowing of crops and ultimately demand for pesticides highly monsoon‐dependent. Drought or deficient rainfall affects sowing areas and production for kharif crops, which also affects farmers’ inclination to consume agriculture inputs in the next season (Rabi). North region is highly irrigated compared to other regions

Source: Ministry of Agriculture, PhillipCapital India Research High working capital needs • The agriculture‐inputs industry has to offer more credit days to distributors,

dealers, and retailers, along with higher inventories and some discounts. This is because most farmers have long‐term relationships with channel partners, so they are regularly offered longer credit days by the channel.

• Also, share of unorganised companies is high, and competition from them forces organised players to offer competitive discounts/credit days.

• Pesticides constitute 3‐5% of the operating costs of cultivation, especially for paddy and cotton (for other crops, costs are much lower). So farmers have limited money to spend on crop protection after covering for labour charges. Therefore, companies have to remain competitive, innovative, and continue to educate farmers (about the usage of their products) to get a larger share of their already limited spending on pesticides.

Genetically modified crops GM seeds that bears pest‐resistant genes continue to pose a threat to pesticides usage. The Government of India allowed usage of BT cotton in 2002 and it was introduced by Monsanto and Mahyco in a JV. Cotton production has increased c.4x since 2002 to touch 35mn bales in FY18. Commercial release of other GM crops poses a serious risk to the crop‐protection industry.

0

10

20

30

40

50

60

70

80

90

100

EASTNORTH SOUTH WEST



Cotton production

Source: Ministry of agriculture, PhillipCapital India Research, 170kgs for each bales Currency risk India’s agrochemicals exports are close to 50% or about US$ 2bn and most companies are sourcing 25‐30% raw materials (by value) from outside India. Higher fluctuation in the USDINR are likely to affect earnings of companies, even though they pass on the higher costs by increasing prices with some lag. The organised industry is facing a severe threat from non‐genuine/illegal pesticides • These are spurious products – not registered with low or incorrect active

ingredients or misbranded or trademark infringed. • The non‐genuine industry covered c.25% of the market in value or c.30% by

volumes in 2013, according to a study by FICCI with TSMG. This market is expected to have constantly grown by c.20% each year to touch c.40% of market value by FY19.

• The study indicates that UP, Jharkhand, MP, AP, Maharashtra, Haryana, and Karnataka are highly affected by illegal or non‐genuine products.

• Farmers’ usage is much higher for these products, largely due to unawareness, mis‐selling by retailers for better margins, and farmers’ habit of buying low‐priced products for reducing cost of cultivation.

• High usage of these products affects crop yields, damages the environment, and reduces the farmers’ confidence about using pesticides.

0

5

10

15

20

25

30

35

40

mn bales



Comparative analysis of agro‐chem companies Export driven companies are better placed in terms of sales growth • Most companies have delivered positive growth over a past decade, but

companies with large export exposure such as UPL, PI Industries, and Sharda, continue to deliver double‐digit sales growth.

• Growth for Bayer Cropscience, Rallis, Dhanuka, and Insecticide India was affected largely by their domestic presence (large dependence on monsoon) and discontinuation of some products.

• UPL and PI Industries are better placed due to their high exposure towards the exports market – PI’s CSM segment and UPL’s recent acquisition of Arysta will provide exposure to multiple regions and product offerings.

Revenue trend CAGR Companies FY19 (Rs bn) 10yr 5yr 3yr 1yrUPL 218.3 16% 15% 16% 26%Bayer CropScience 26.0 7% ‐2% 1% 6%PI Industries 28.4 20% 12% 11% 25%Sharda Cropchem 20.0 Na 22% 20% 23%Rallis India 19.8 9% 3% 11% 14%Excel Crop Care 11.8 7% 6% 14% 17%Insecticides India 11.9 16% 6% 6% 9%Dhanuka Agritech 9.8 10% 6% 7% 6%

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research EBITDA margin is driven by exposure to exports • Margins are much higher for PI Industries, UPL, and Sharda Cropchem because of

higher export contribution at 70%, 85%, and 100%, respectively. • Export‐driven companies have much higher margins than many global innovators

mainly due to low costs of production. • Rallis has seen a continuous decline in margins while Excel Crop and Insecticides

India and Dhanuka have seen margin volatility.

Margins are better for larger exposure in exports Companies FY15 FY16 FY17 FY18 FY19PI Industries 19.2% 20.6% 24.3% 21.7% 20.3%UPL 19.5% 18.6% 19.8% 20.2% 18.8% Sharda Cropchem 18.0% 22.3% 22.5% 20.2% 18.0%Bayer CropScience 13.8% 16.2% 14.8% 15.1% 16.7%Insecticides India 11.7% 9.3% 11.2% 13.8% 15.2%Dhanuka Agritech 17.5% 17.7% 19.9% 17.4% 13.9%Rallis India 15.2% 15.1% 15.8% 14.8% 13.4%Excel Crop Care 10.0% 10.6% 10.3% 12.0% 12.1%


Global companies’ margins are lower than Indian exporters primarily due to costs Companies CY2014 CY2015 CY2016 CY2017 CY2018FMC Corp 16% ‐3% 14% 14% 22%Nufarm 9% 8% 10% 12% 9%Syngenta AG 18% 18% 18% 5% 20%Bayer AG 20% 21% 25% 24% 18%BASF SE 15% 15% 19% 19% 15%DowDuPont Inc Na 12% 11% 7% 13%Adama Agri Solutions 15% 15% 17% 17% 24%




Working capital trend • UPL and Sharda Cropchem have the higher cash‐conversion days with exposure

towards exports and large presence in formulation. • PI Industries, Dhanuka Agritech, and Rallis India have much lower cash‐

conversion days due to internal policies and lower payable days. • Insecticides India, UPL, Dhanuka, and Rallis India have c.150‐day inventories

compared to PI Industries and Sharda Cropchem at c.100 days.

Debtor days Companies FY15 FY16 FY17 FY18 FY19Sharda Cropchem 147 160 169 167 155 UPL 125 133 127 127 197 Bayer CropScience 46 62 60 81 85 PI Industries 72 69 68 84 85 Insecticides India 35 65 71 67 67 Dhanuka Agritech 77 76 67 73 77 Excel Crop Care 57 67 68 71 85Rallis India 40 53 51 67 78


Creditor days Companies FY15 FY16 FY17 FY18 FY19UPL 164 154 145 147 197 Sharda Cropchem 97 122 148 134 153 Insecticides India 50 88 83 91 78 Excel Crop Care 82 78 89 95 105PI Industries 107 103 90 100 105 Bayer CropScience 33 39 38 50 66 Dhanuka Agritech 33 34 30 37 35 Rallis India 71 83 86 100 110


Inventory days Companies FY15 FY16 FY17 FY18 FY19UPL 129 121 116 119 191 Insecticides India 86 129 132 125 155 Bayer CropScience 52 78 89 100 110 Sharda Cropchem 38 45 58 88 82 Rallis India 69 89 82 98 115 Excel Crop Care 76 81 80 89 80PI Industries 88 87 91 92 86 Dhanuka Agritech 85 73 80 88 75


Fixed assets turnover is high for assets‐light business models • Sharda Cropchem, Bayer Cropscience, and Dhanuka have high assets turnovers

due to outsourcing of formulations manufacturing. • PI Industries, Insecticides India, and UPL have lower asset turnover due to

presence in domestic manufacturing of technical, formulation, and intermediates.

• Dhanuka Agritech relies highly on in‐licensing of molecules by having tie‐ups with many innovators. Sharda Cropchem depends on 100% outsourcing, mainly from China and other regions such as Europe and NAFTA.



Asset‐light companies have better FAT Companies FY15 FY16 FY17 FY18 FY19PI Industries 3.3 2.3 2.1 1.9 1.9 Insecticides India 7.8 4.3 4.8 5.2 4.7 Rallis India 2.2 2.2 2.8 2.7 2.7 UPL 1.5 1.5 1.7 1.6 0.7 Excel Crop Care 4.1 3.3 4.0 5.5 8.0Dhanuka Agritech 8.4 6.4 6.1 6.2 6.4 Bayer CropScience 8.5 7.7 8.7 7.4 6.8 Sharda Cropchem 3.9 5.3 6.1 5.1 4.0

Source: Bloomberg, Companies, Ace equity, PhillipCapital India Research Agrochemical companies enjoys healthy return ratios (better then fertiliser) • Agrochem companies have limited capex requirements and limited intervention

from the government. This drives better ROCE. Limited debt also generates better ROEs for most companies.

ROCE Companies FY15 FY16 FY17 FY18 FY19Dhanuka Agritech 33.0 32.0 33.9 28.8 23.8 PI Industries 34.9 30.8 30.2 23.9 23.6 Sharda Cropchem 28.7 35.9 31.8 26.7 19.7 Rallis India 26.9 21.1 36.6 19.8 17.7 Bayer CropScience 30.6 25.4 23.3 21.6 20.5 Excel Crop Care 24.7 20.9 23.6 24.8 Na Insecticides India 26.8 12.4 15.5 19.7 20.6 UPL 24.0 20.9 21.9 20.6 6.8


ROE Companies FY15 FY16 FY17 FY18 FY19PI Industries 26.8 26.6 28.2 19.1 17.9 Dhanuka Agritech 28.8 24.2 24.3 21.8 17.7 UPL 24.6 22.7 28.2 24.1 14.5 Sharda Cropchem 20.3 24.0 21.6 18.2 14.6 Rallis India 20.9 17.3 29.7 14.5 12.5 Insecticides India 28.3 11.3 13.6 16.6 20.2 Excel Crop Care 19.1 16.4 18.0 16.5 14.1Bayer CropScience 20.3 16.3 14.9 15.7 13.0




Peer group analysis

MCap Rev

(FY19)EBITDA

Margin (%) CAGR (FY19‐21e %) EPS (Rs) P/E (x) Companies RRs bn) Rs bn (FY19) Rev EBITDA EPS FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22eUPL* 422 218 18.8 24.6 28.4 22.2 27.8 32.4 41.3 50.7 19.9 17.1 13.4 10.9PI* 159 28 20.3 19.0 22.5 20.9 29.7 32.8 41.2 52.5 38.9 35.3 28.1 22.0Bayer CropScience 106 26 14.3 21.1 35.7 32.0 69.2 88.6 120.5 Na 44.7 34.9 25.7 NaBASF India 44 60 2.7 10.1 58.0 72.0 18.9 39.4 55.8 Na 53.2 25.5 18.0 NaMonsanto India 35 7 24.3 Na Na Na 87.9 Na Na Na 22.9 Na Na NaRallis India 30 20 12.1 12.0 20.0 18.5 8.0 9.5 11.2 Na 19.4 16.3 13.8 NaExcel Crop 35 12 11.6 Na Na Na 79.4 Na Na Na 40.1 Na Na NaSharda Crop 25 20 16.2 12.8 19.8 14.7 19.6 21.4 25.7 Na 14.0 12.8 10.7 NaBharat Rasayan 20 26 19.1 Na Na Na 262.5 Na Na Na 18.3 Na Na NaDhanuka Agritech 15 10 15.0 11.7 18.5 12.6 23.7 25.3 30.0 Na 13.1 12.3 10.4 NaInsecticides India 12 12 15.6 10.6 15.3 9.0 59.4 59.7 70.6 Na 10.0 9.9 8.4 Na


Peer group analysis

EV/EBITDA (x) D/E (x) ROE (%) ROCE (%) Companies FY19 FY20e FY21e FY22e FY19 FY19 FY20e FY21e FY22e FY19 FY20e FY21e FY22eUPL* 7.5 6.7 8.6 7.5 2.0 14.5 15.1 16.7 17.5 6.8 9.3 11.2 12.9PI* 27.5 23.7 18.8 14.8 0.0 17.9 17.0 18.1 19.2 23.6 22.3 23.7 25.1Bayer CropScience 39.6 21.1 15.2 Na 0.0 13.1 14.8 15.7 Na 15.6 Na Na NaBASF India 37.2 12.5 10.7 Na 0.6 20.3 16.6 17.3 Na Na Na Na NaMonsanto India 26.5 Na 29.6 Na 0.0 Na Na 27.3 Na 29.2 Na Na NaRallis India 12.9 10.4 8.7 Na 0.1 12.5 13.5 14.6 Na 17.0 Na Na NaExcel Crop 29.0 Na Na Na 0.0 14.2 Na Na Na Na Na Na NaSharda Crop 9.2 5.8 4.9 Na 0.0 14.6 14.1 15.0 Na Na Na Na NaBharat Rasayan 10.5 Na Na Na 0.4 31.5 Na Na Na Na Na Na NaDhanuka Agritech 12.6 9.1 7.8 Na 0.0 17.7 17.6 17.9 Na 19.7 Na Na NaInsecticides India 8.9 7.3 6.4 Na 0.5 20.3 16.6 17.3 Na 22.7 Na Na Na




PI Industries Ltd (PI IN) CSM leadership and much more INDIA | AGROCHEMICALS | Initiating Coverage

4 September 2019

Leader in CSM; strong order book of US$ 1.3bn and capex to drive growth PI is a large player in the synthesis and manufacturing solutions (CSM) segment in India based on: (1) A strong order book of US$ 1.4bn implying good revenue visibility over FY19‐21. CSM revenue CAGR was c.30% over the past decade; we expect c.26% over FY19‐22 in order‐book execution, commercialisation of new molecules, and benefits of additional capex. (2) One of PI’s multipurpose plants at Jambusar in Gujarat is already up and running in Q4FY19 at a capex of Rs 3bn in FY19. Additionally, it is adding two units in FY20 at a cost of Rs 4.0‐4.5bn (one in Q2 and another in Q4) and similar capex is planned for FY21. (3) Global innovators continue to increase spending on R&D, indicating better outlook for CSM ahead. PI will be the biggest beneficiary in India.

Expanding beyond agrochemicals in CSM to provide strong visibility over the long term PI is leveraging its complex chemistry skill sets and cost‐effective R&D capability. It is diversifying its CSM service portfolio beyond agrochemicals to electronic chemicals, pharmaceuticals, fluorospecialty, fine chemicals, etc., because of which its product capability will increase to c.60 from c.40. We expect the capacity expansion with new business verticals to help PI improve produce pipelines and order book in coming years.

Benefiting from China’s slow and limited competition India is being increasingly seen as a reliable partner for CSM by global innovators; they view stability and sustainability as most important while choosing outsourcing partners. After China’s environmental concerns, costs have begun increasing there, and reliability and capability is perceived to have reduced. As a result, innovators have gradually begun preferring India as a long‐term partner. For innovators, CSM helps minimise the cost of bringing molecules from the discovery stage to the commercialisation stage. The entire process can take US$ 400‐500mn for global innovators when they do it in their home countries, but outsourcing to countries such as India cuts the cost down to half and time of development meaningfully. We expect PI will continue to benefit in terms of winning orders from innovators, as it has very few peers in the domestic market for CSM, especially in agrochemicals, because PI has built a strong and trusted relationship with innovators over the past few decades.

Block buster brands and new addition of exclusive molecules will propel growth PI’s domestic segment covers c.40% of its revenue and is dominated by five key products. Nominee Gold (herbicide) still contributes c.30% of its revenue, despite being a non‐exclusive molecule, which we expect will sustain along with increasing volumes (FY19 growth was c.20%) but with some price correction. PI will launch two new exclusive molecules – Pyroxasulfone (herbicide) and PB Rope L (insecticides) in FY20/21, which should add to domestic revenue.

Outlook and valuation We expect revenue/EBITDA CAGR of 19%/23% over FY19‐22 to Rs 48bn/Rs 10.6bn, largely driven by CSM, which will drive major segment growth at 26% CAGR over the same period. In terms of relative valuation, PI has always traded at premium to its peers, mainly due to its leadership in CSM and its patented or exclusive in‐licensing molecules offerings in the domestic market. On an average, the company commands a premium of c.50% over Rallis, Sharda, Dhanuka Agritech, and UPL. We expect PI’s valuation premium to sustain, considering its leadership in operating margins, ROCE, and strong revenue visibility on a robust order book. Increasing spending in R&D by innovators and rationalisation of manufacturing by China will help PI’s business to be less vulnerable than domestic peers. Therefore, we assign 18x Sept 2021 EV/EBITDA to arrive at a target of Rs 1,350 (implying 29x Sept FY21 PE). We initiate coverage with a Buy rating.

BUY CMP RS 1155 TARGET RS 1350 (17%) COMPANY DATA O/S SHARES (MN) : 138MARKET CAP (RSBN) : 160MARKET CAP (USDBN) : 2.252 ‐ WK HI/LO (RS) : 1229 / 692LIQUIDITY 3M (USDMN) : 2.61PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Jun 19 Mar 19 Dec 18PROMOTERS : 51.4 51.4 51.4FII / NRI : 13.5 15.5 15.2FI / MF : 18.7 18.1 18.6NON PRO : 4.6 4.5 4.5PUBLIC & OTHERS : 11.7 10.5 10.2 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 6.8 1.3 49.4REL TO BSE 8.5 10.2 53.7 PRICE VS. SENSEX

Source: PhillipCapital India Research KEY FINANCIALS Rs mn FY19 FY20E FY21ENet Sales 27,918 31,987 38,806EBIDTA 5,764 6,706 8,411Net Profit 4,102 4,522 5,682EPS, Rs 29.7 32.8 41.2PER, x 38.9 35.3 28.1EV/EBIDTA, x 27.3 23.5 18.7P/BV, x 7.0 6.0 5.1ROE, % 17.9 17.0 18.1


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PI INDUSTRIES INITIATING COVERAGE

About the company • PI was incorporated in 1947 with a focus on complex chemistry solutions in agri

inputs. Its Custom Synthesis Manufacturing (CSM) started in 1996. It is one of the few companies in this niche area in the domestic market.

• Operates in two areas – domestic business (c.33% of FY19 revenue) and exports covering CSM (c.67% of FY19 revenue).

• Has 3 formulation facilities and 9 multiproduct plants at 3 strategic locations. • R&D (research and development) facility at Udaipur with a team of more than

350 scientists includes advanced research and development labs and kilo and pilot plants.

• Has strategic tie ups with BASF, Kumiai, and Mitsui Chemicals for its branded domestic business, but has a strong clientele of global innovators for CSM.

PI’s evolution

Source: Company, PhillipCapital India Research Business overview • Strengths:

o Built up the business since 1990s. o Presence in custom research in agrochemicals. o Strong distribution network, brand building, and manufacturing capabilities.

• PI’s business largely depends on its relationships with global innovators. It wins business based on its respect for IP (intellectual property), especially in CSM.

• PI’s manufacturing facilities are in Gujarat at Jambusar (Bharuch) and Panoli (Ankleshwar) – total 8 units.

• It has developed and set up an R&D centre in Udaipur mainly to support custom manufacturing.

• In FY19, PI derived 67% of revenue from exports (CSM) and the rest (33%) from domestic branded product sales.

• Commissioned a multi‐product facility at its Jambusar site.

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1996: Forayed into CSM

2018: JV with Kumiai Chemical Industry Co, Japan2018: Launched 5 new generation products for the first time

2004: Established China Representative office. Established PI Life Science Research Ltd

2010: Divested polymer business to Rhodia, France

2012: New manufacturing site at Jambusar, Gujarat. Established PI Sony Research Center at Udaipu

2015: Commissioned a formulation unit at Panoli, Gujarat2015: JV with Mitsui Chemicals Agro Inc, Japan

2017: Strategic alliance with BASF

2014: Marketing office in Germany

2001: Implemented SAP and unique BI tools to digitalise agchem distribution channel

2002: Establishment of PI Japan Co. Ltd. (Subsidiary)

2016: New R&D centre at Udaipur2016: Commissioned two new MPP at Jambusar

2019: Commissioned a multi product facility at Jambusar site



Growth is largely driven by CSM (exports) revenue Regional revenue is driven by Asia and North America

Source: Company, PhillipCapital India Research Two‐third of its revenue comes from active ingredients and intermediates (entirely CSM)


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Investment rational Leading Indian player in agrochemical custom synthesis and manufacturing The agro‐innovation business has become less remunerative because of ever‐rising regulatory complexities, steady increase in development cost (>60% jump in the last two decades), and rising timelines for developing new agro molecules (takes 11 years now vs. about 8 two decades ago). This has forced innovators to explore outsourcing. With such a huge global outsourcing opportunity, PI leveraged its technological advancements, right R&D infrastructure, and its respect for intellectual property to emerge as the preferred CSM partner for ‘co‐innovation’ for global agrochemical companies. In CSM, PI works with almost all innovators such as BASF, Syngenta, Bayer, and Kumiai Chemical. It provides end‐to‐end integrated and innovative solutions to its customers for developing new molecules – from the post‐discovery phase to commercialisation – quickly and economically. PI offers end‐to‐end solutions in the CSM segment


Involved in the major life‐cycle of molecules, wins regular orders PI focuses on manufacturing patented molecules in the early stages of their life‐cycle, which involves complex chemistries. This helps it to remain involved with the major life‐cycle (except discovery and marketing) of molecules and win regular orders. One CSM order normally takes 3‐5 years to reach commercialisation, after which revenue visibility is about 5‐8 years, unless a new molecule is discovered. It takes about 2.5 years for large commercial CSM orders from innovators Timeline to get CSM order

About two and half years for long term agreement with innovators 2 month 1 month 2 month 1 month 2 month 3 month 18 months

Process/steps to get large CSM order

Enquiry received

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CSM revenue saw robust 30% CAGR over the last decade PI started its CSM operations in 1996. From FY09 to FY19, its CSM revenue CAGR was c.30% to touch Rs 19bn (a little less than 70% of its consolidated revenue) from 33% in FY10.

PI offers integrated solutions of process innovation to scale‐up to commercialisation under CSM

CSM is a a flagship segment of PI



CSM revenue: c.30% CAGR over a decade; revenue share two‐third


CSM sales growth was in tandem with its order book position 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$ 1.35bn – 22% CAGR over the last five years. CSM order book to revenue provides strong visibility in coming years

Source: Company, PhillipCapital India Research New molecule development pipeline multiplied in recent years Although PI’s pace of bringing molecules to commercialisation has remained muted – with 2 molecules in FY15, 4 in FY18, and 3 in FY19 – its developmental portfolio jumped 3x to 48 new molecules(synthesis) from 15 in FY16 following its expanding order‐book position. The growing developmental portfolio and rising order book certainly provides robust growth visibility for its CSM operations, and we expect PI’s earning efficiency to improve meaningfully since CSM is a superior‐margin operation that is set to see faster growth ahead.

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Synthesis of new molecules multiplied over the last few years

Source: Company, PhillipCapital India Research Strong research and development capability to complement CSM growth o R&D is a core strength – for bringing repeat orders in CSM from global

innovators. It helps push develop discovered molecules to the commercialisation stage. Each molecule has different treatments and development strategies or methodologies. PI enters into an arrangement with innovators for 6‐8 years to bring molecules to the commercialisation stage.

o Its R&D facility supports partnerships with global innovators for in‐licensing arrangements for patented products.

o PI has multi‐functional capacities with global standards. The R&D centre is spread over 120,000 sq. ft. at Udaipur, Rajasthan. The facility houses 350+ research scientists, including 80 doctorates that specialise in process research and complex chemistries.

o It has relevant infrastructure and lab facilities, which allow scientists to carry out specialised discovery, including library synthesis, molecule design, lead optimisation, and biological testing. While R&D capabilities are critical for PI to build global clientele for innovative agri solution offerings, they do not contribute directly to revenues.

o Given PI’s focus on developing more technical capabilities to meet rising demand of innovators, its investments into R&D growth grew rapidly at 33% CAGR over the past five years to Rs 838mn. Also, R&D spend as a percentage of CSM revenue increased to c.4% in FY19 from c.2% in FY14, indicating stronger potential for executing the order book.

R&D spend expanded at 33% CAGR over the last five years


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While 3‐4 new products from PI’s CSM portfolio saw commercialisation per annum, its developmental portfolio witnessed 3‐fold jump in the recent years indicating robust growth scope in the CSM operation going ahead



Capacity expansion ensures overall growth Of late, PI’s available capacity had begun to look constrained in the light of an improving outlook for agrochemicals outsourcing in general, PI’s multiplying developmental product pipeline (3x in the last three years), and rising order‐book position (to more than 5x CSM annual sales). It has already built two units (multi‐product plants) at Jambusar in Q3‐Q4 FY19 with an investment of c.Rs 3.5‐4.0bn. Additionally, it has plans to set up two more units at Jambusar at a cost of Rs 4.0‐4.5bn by FY20, and similar capex is planned for FY21. This aggressive capex plan provides a cumulative annual revenue visibility of around Rs 25bn from FY22 (since its historical asset turn has been about 2x). Aggressive capex to drive revenue growth in the coming years

Source: Company, PhillipCapital India Research Revenue and capex


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Expansion at Jambusar (picture about one year ago)

Source: Google map, company, PhillipCapital India Research Recent image

Source: Google map, PhillipCapital India Research Rising R&D spend provides secular opportunities for PI • Global innovators are gradually increasing their spending on R&D for

development of new molecules due to gradual increase in R&D cost, poor cropping practices in emerging markets, and change in weather patterns. Companies such as Bayer, BASF, Sumitomo Chemicals, and FMC have seen continued rise in R&D expenses over the past few years.

• As a result, R&D spending for major global innovating companies has increased to on an average c.6% of revenue in CY18 from c.4% in CY11. This indicates a larger push towards molecule discovery, providing visibility for the CSM businesses.

Expansion at Jambusar

Proposed expansion areas



• PI’s strong hold on R&D with increasing R&D spending and dedicated scientists at its Udaipur facility provides visibility to fulfil its order book and generate larger orders in coming years.

• Its manufacturing facility is multipurpose and it has more than 40 molecules in the pipelines; expects to commercialise 3‐4 every year.

Rising R&D spend by major agrochemicals companies

Source: Bloomberg, PhillipCapital India Research, as % of sales for major companies Innovators R&D spend on rise Companies Country Revenue in 2018

(USD bn) R&D exp.(USD bn)

As % of sales R&D expenses (CAGR) 9 year 5 year 3 year YoY chg.

Bayer AG Germany 46.76 6.20 13.3% 5.5% 6.5% 9.3% 21.8%DowDuPont Inc USA 85.98 3.06 3.6% Na Na ‐4.0% ‐3.1%BASF SE Germany 74.03 2.40 3.2% 2.3% ‐0.5% 3.4% 15.0%Sumitomo Chemi Japan 19.77 1.46 7.4% 1.6% ‐0.2% 3.3% 2.0%*Syngenta AG Switzerland 13.52 1.27 9.4% 3.5% ‐1.1% ‐1.5% 2.1%Mitsubishi Chem Japan 33.62 1.25 3.7% ‐0.2% ‐5.1% 1.2% 7.3%Mitsui Chem Japan 11.99 0.30 2.5% ‐3.2% ‐4.8% 0.6% 5.8%FMC Corp USA 4.73 0.29 6.2% 13.6% 20.3% 29.0% 106.0%Nippon Kayaku Japan 1.52 0.10 6.8% 0.4% Na ‐2.9% ‐16.4%Nippon Soda Japan 1.28 0.07 5.1% Na Na Na 8.9%*Adama Agri. Sol. Israel 3.54 0.05 1.4% Na Na Na 20.4%Nihon Nohyaku Japan 0.55 0.04 7.7% Na Na Na ‐5.80%Kumiai Chemical Japan 0.88 0.02 1.7% Na Na Na ‐1.9%Oat Agrio Japan 0.14 0.01 8.5% Na Na Na 6.9%SDS Biotech Japan 0.12 0.01 7.7% Na Na Na ‐11.4%

Source: Bloomberg, PhillipCapital India Research, *Owned by Chemchina

Expanding beyond agrochemicals PI has already emerged as one of the leading global player for providing cost‐effective end‐to‐end customised solutions for developing new agro chemicals to most leading agro innovators of the world. This is thanks to its R&D capabilities, which helped it to build one of the strongest clientele among agro innovators. Leveraging its complex chemistry skill sets, and cost‐effective R&D capability, PI is diversifying its CSM service portfolio beyond agrochemicals to electronic chemicals, pharmaceuticals, fluorospecialty, fine chemicals, etc. Accordingly, it has designed a Rs 10bn capacity expansion (current gross block is c.Rs 15bn) at Jambusar in Gujarat, which will be capitalised in phases over the next 3‐4 years. This is expected to support broader areas in CSM – in line with global companies’ business models.

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PI is one of the most diversified CSM players in the world Companies Country Revenue EBITDA

marginBusiness verticals

USD mn Agro chem

Electro. chem Pharma Specialty chem

Fine chem Florospecialty

PI Industries India 405 20% • • • • • • Deccan Chem India 247 26% • • • Hikal India 198 19% • • Lonza Switzerland 5,666 25% • • Saltigo Germany 8,046 14% • • • Evonik Germany 17,745 15% • Albemarle Germany 3,375 33% • • Weylchem Germany 643 NA • • • • • Alzchem Germany 443 13% • •

Source: Bloomberg, PhillipCapital India Research, Revenue and EBITDA margin for 2018/FY18 Proposed product list for the expanded plant at Jambusar Product list Capacity after expansion (mt) Nos of productsInsecticides and intermediates 4,800 12Herbicides and intermediates 5,650 17Fungicides and intermediates 3,550 8Pyrazoles 5,500 1Fine chemicals 7,500 13Florospeciality products 2,000 1Pharma Intermediates 1,000 1Speciality chemicals 1,000 5Performance chemicals 13,000 2New R&D products 240 1Total 44,240 61

Source: Industry, PhillipCapital India Research Clampdown in China could multiply PI’s CSM opportunity For innovators, CSM helps minimise the cost of bringing molecules from the discovery stage to the commercialisation stage. The entire process can take US$ 400‐500mn for global innovators when they do it in their home countries, but outsourcing to countries such as India cuts the cost down to half, and the time taken for development, meaningfully. India has already emerged as a reliable partner for global innovators for CSM. Environmental concerns in China are likely to increase costs in that country and reduce its reliability perception for innovators. India has strategic advantages of cost, reliability, capability, and skilled manpower to execute or bring molecules to the commercial stage. With its research capability and long relationship with innovators, PI will continue to benefit from China’s slowdown in coming years. Interestingly, China used to manufacture over 75% of global agrochemical demand as of FY17. This provides enough visibility for India’s multi‐fold CSM opportunity and for PI in particular. Domestic business is better placed than peers • In India, PI offers agrochemicals and plants nutrients under its own brands in

these three ways: 1. In‐licensing newly launched molecules by innovators. 2. Manufacturing and marketing of branded generic products. 3. Selectively marketing products by co‐marketing with global innovators.

• PI is much better placed than its peers due to its differentiated business model, especially CSM, which supports bringing novel or exclusive molecules to the domestic market based on long‐term relationships with innovators, its reputation, and reliability. This also helps PI to generate long‐term revenue for the molecules due to a higher life‐cycle.



• PI has built up brands over the years in the domestic market based on a wide distribution network across India and quality of products in the portfolio. It has +84,000 retail points and +10,000 channel partners.

• It derives c.80% of its domestic revenue from in‐licensing products and the rest from co‐marketing or generic business.

• Domestic business is more volatile compared to CSM due to volatile demand that depends on the weather and how much farmers can afford at a point in time. But despite this, PI’s 8‐year domestic business CAGR was c.10%. Growth was slower in the past 3 years.

Presence across India Revenue and growth

Source: Company, PhillipCapital India Research Strong domestic product portfolio PI’s domestic portfolio of c.44 products is largely dominated by insecticides (c.40% of domestic products) and about one fourth each from fungicides and herbicides. PI regularly launches new products to leverage the advantage of its global tie‐ups and relationship with innovators. In FY18, PI launched 5 products mainly to focus on rice, corn, and fruits and vegetables (mainly into fungicides – see table below), followed by 2 new products in FY19. These products helped it gain strong growth momentum over the last two years from a weak base of FY17, when it had faced the expiry of exclusivity in its leading brand Nominee Gold. PI expects to launch at least 3‐4 exclusive products in FY20, which can boost its growth momentum, provided monsoon remains conducive. New product launches


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New product launches trend Year of launch Brand Category Technical Crops FY13 Osheen Insecticides Dinotefuran 20% SG Paddy, cotton FY13 Fluton Insecticides Flubendiamide 20% WG Rice, cotton, vegetables FY13 Cuprina Fungicides Copper Oxychloride 50%WG Grapes, Mango FY14 Melsa Herbicides Pinoxaden 5.1% EC Wheat FY14 Pimix Herbicides Metsulfuron methyl 10% + Chlorimuron ethyl

10% WP Rice

FY15 Keefun Insecticides Tolfenpyrad 15% EC Cabbage, Okra FY15 Bunker Herbicides Pendimethalin 30 EC Wheat, Rice, Cotton, Soybean FY16 Vibrant Insecticides Thiocyclam Hydrogen Oxalate 4% GR Rice FY16 Perido Fungicides Propiconazole 25%EC Wheat, Rice, Cotton, Soybean, Bananna, Tea, Coffee,

Groundnut FY16 Biovita x Specialty Products Ascophyllum nodosum Fruits, vegetables, Field crops FY17 Legacee Herbicides Fenoxaprop‐p‐ethyl 6.9% EC Rice FY18 Header Fungicides Pyraclostrobin 10% CS Rice FY18 Fender Fungicides Fluxapyroxad 6.25% + Epoxiconazole 6.25% EC Rice FY18 Visma Fungicides Pyraclostrobin 12.8% + Boscalid 25.2% WG Grapes FY18 Humesol Specialty Products Humic Acid 18% Fulvic Acid 1.5% Fruits, vegetables, Field crops FY18 Elite Herbicides Topramezone 33.6%SC Corn FY19 Cosko Insecticides Rynaxypyr Paddy and Sugarcane FY19 Fantom Fungicides Picoxystrobin & Tricyclazole Paddy, Chilli

Source: Company, PhillipCapital India Research Block buster brands in the existing portfolio should maintain domestic growth • Herbicides: Nominee Gold (bispyribac sodium) is its blockbuster rice herbicide

launched in FY10 and remains a major revenue contributor, even after competition from other domestic players (after exclusivity ended in FY17) such as Gharda Chemicals, Insecticide India (Green Label), Godrej Agrovet, Excel Crop (Junoon), Adama (Narkis), and Chambal Fert (Fillip). This is because of the brand recall that Nominee commands. The product is a tie‐up with Japan‐based innovator Kumiai Chemicals.

According to our interaction with distributors and other channel partners, Nominee Gold still contributes c.30% of revenue over the past four years vs. c.35% five years ago. PI is expected to have managed revenue share by increasing volumes over the past two years (since exclusivity was over) by c.50% where prices fell by 20%. We expect Nominee Gold to sustain 30% revenue share (it was c.Rs 3bn in FY19) ahead. A decline in prices should help PI to improve volumes as farmers would prefer to buy branded and trusted products at lower prices.

• Insecticides: Major products in insecticides are Osheen (dinotefuran 20% SG), Roket (Profenofos 40%+ Cypermethrin 4% EC) and Fosmite (Ethion 50% EC). Osheen for paddy and cotton is another major revenue contributor. Osheen was launched in FY13 via in‐licensing with Mitsui Chemicals and is estimated to have contributed c.Rs 1bn of revenue per annum over the past two years. Osheen will continue to manage higher revenue contribution in coming years, as PI is aggressively pushing volume growth (c.1.5x in five years) due to its strong brand recall over the past five years despite price decline of c.20%.

• Speciality product: PI’s Biovita is a popular product among farmers. It is based on seaweed Ascophyllum nodosum. Biovita supports plants in getting naturally balanced nutrients and provides a source of organic matter from seaweed. Farmers’ awareness about using bio‐solution products is increasing (CAGR of 11‐12% globally for bio‐fertiliser, pesticides, and stimulants). PI’s products such as Biovita and Humesol (bio‐stimulant products) should gain market share as awareness increases. Globally, the bio‐solutions market is estimated at US$ 6bn and is likely to reach US$ 11‐13bn in 2‐4 years, providing better growth opportunities.



New product launches will aid growth • Focus area ‐ crops with larger addressable areas – rice, wheat, and cotton. • Strategy ‐ Farmers spend considerable money buying pesticides, but with limited

impact. PI tries to reduce their costs by offering quality products that can address the real problem and thus actually reduce their cost of cultivation, even when its product is priced higher. This develops long‐term trust and brand recall, such as with Nominee Gold.

As per the Ministry of Agriculture’s record, PI should launch two blockbuster products in FY20: Pyroxasulfone (herbicide for corn, wheat, and soybean) and PB Rope L (insecticide for cotton). • Pyroxasulfone: PI is in the process of launching the product during the rabi

season under the 9(3) category (differentiated products launch for the first time in India compared to 9‐(4) wherein molecule is a generic product). Pyroxasulfone, a herbicide (pre‐emergent) for field crops, is one of the molecules going off patent. It was discovered and patented by Kumiai Chemicals (Japan) in 2011 under the brand Axeev. It is effective on a wide range of weeds – from grasses to small broadleaf – and effective on those resistant to herbicides such as glyphosate. PI is targeting to launch the product by in‐licensing with Kumiai Chemicals. According to our channel checks, Pyroxasulfone (Awkira brand) will initially target wheat, corn, and soybean and then extend towards other crops such as sugarcane.

• PB Rope L: PI is also in the process of receiving approval for PB Rope L to address

the problem of pink ball‐worm (PBW) in cotton. PBW is a major problem in India due to the long duration that the varieties grown take to mature and absence strong control measures. PBW develops inside cotton balls so it is difficult to address it using chemicals. PB Rope L application releases the same scent that female ball‐worms release to attract males and this confuses the male adults and prevents mating. This reduces the number of eggs laid and reduces crop damages. PI has already registered the brand for PB Rope L as “PB Knot” and is planning to launch the product in FY20.



Financial performance Revenue growth in FY19‐22 to be largely supported by CSM PI’s unique business model with strong presence in CSM (exports) and exposure towards exclusive molecules offerings in the domestic market on strong relationships with global innovators provides strong visibility for revenue growth in FY20‐22. PI’s revenue was at c.18% CAGR in the past decade and c.15% in the last five years, much better then peers. We expect revenue CAGR of 19% over FY19‐22, largely driven by the CSM segment. Domestic segment will see muted growth in FY20 on erratic weather, which has affected planting in kharif. We expect domestic growth to be insignificant in FY20 as negative growth in H1FY20 will be compensated with better growth in H2FY20 as PI will launch new products for rabi season. We believe PI will continue to outperform its peers due to better CSM revenue visibility in coming years led by additional capex, strong order book, commercialisation of new molecules, and the gradually increasing global focus on the Indian market for CSM (the shift away from China). The domestic segment’s growth will be largely driven by the introduction of exclusive molecules and the strength of its existing product portfolio. Stronger revenue growth in FY19‐22, driven by the CSM segment

Source: Company, PhillipCapital India Research Margins are set to improve with better sourcing and new products offerings PI’s EBITDA margins were hurt by rising raw material costs and higher inventories. However, it has maintained better margins than Indian peers due to its unique CSM business model. We expect margins to improve going ahead mainly due to: (1) Improvement in global agrochemicals market (innovators have started increasing spending on R&D), (2) PI’s dependence on sourcing raw materials from China (18‐20% currently) gradually reducing; diversifying to others countries in South Asia, and (3) its new and exclusive product launches in the domestic market, which could earn better margins than old products such as Nominee Gold. We expect EBITDA margin to gradually increase during FY19‐22 and reach about 22% by FY22.

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Growth pace to continue driven mainly driven by export PI's CSM business is keeping margins ahead of peers

Source: Company, PhillipCapital India Research Continuous capex has dented its return ratio, but set to improve

Source: Company, PhillipCapital India Research Steady rise in free cash generation despite growth capex ahead


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UPL Insecticides Excel CropPI Industries Rallis DhanukaSharda Bayer Crop Bharat Rasayan

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Valuation and outlook We expect topline/EBITDA CAGR at 19%/23% over FY19‐22 to Rs 48/10.6bn, largely driven by CSM. CSM will drive most segment growth with 26% CAGR in FY19‐22; domestic business CAGR will be only 2.4% due to slower pick up in demand because of poor rainfall in H1FY20. In terms of relative valuation, PI has always traded at a premium to its peers, mainly due to its leadership in CSM and its patented or exclusive in‐licensing molecules offerings in the domestic market. On an average, the company commands a valuation premium of c.50‐60% over Rallis, Sharda, Dhanuka Agritech, and UPL based on estimated FY20‐21 earnings. We expect PI’s valuation premium to sustain, considering its leadership in operating margins, ROCE, and strong revenue visibility on a robust order book. Increasing spending in R&D by innovators will help PI’s business to be less vulnerable than domestic peers. PI is trading at a PE of 28/22x FY21/22 EPS of Rs 41/53 compared with an average PE of 11‐12x for Dhanuka Agritech, UPL, Rallis, Insecticides India, and Sharda Cropchem. Its strong revenue visibility towards CSM provides better earnings prospects compared with peers. Also, the domestic business, with its differentiated products offering will see better growth vs. peers. Therefore, we assign 18x Sept. 2021 EV/EBITDA and arrive at a target of Rs 1,350 (implying 29x Sept FY21 PE). We initiate coverage with a Buy rating. PE band EV/EBITDA Band

Source: Bloomberg, PhillipCapital India Research Key risks • Unfavourable rainfall: PI’s domestic business is affected by poor rainfall or

uneven distribution in major crop producing states, mainly for paddy and cotton. • Delay in capacity expansion: Any delay in expansion will lead to limited revenue

growth in CSM. • Delay in getting government approval for new products: PI is in the process of

getting regulatory approval for exclusive molecules and further delays will lead to limited visibility for the domestic business.

• High raw material cost: Any rise in raw materials costs, especially in China could impact PI margins. Also, slowdown in R&D spending by innovators would have a marginal impact on PI’s CSM business.

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Financials

Income Statement Y/E Mar, Rs mn FY19 FY20e FY21e FY22eNet sales 27,918 31,987 38,806 47,108Growth, % 24 15 21 21Other income 491 487 591 717Total income 28,409 32,474 39,397 47,826Raw material expenses ‐15,502 ‐17,373 ‐20,801 ‐24,869Employee expenses ‐2,647 ‐3,247 ‐3,940 ‐4,783Other Operating expenses ‐4,496 ‐5,147 ‐6,245 ‐7,581EBITDA (Core) 5,764 6,706 8,411 10,593Growth, % 16.8 16.3 25.4 25.9 Margin, % 20.3 20.6 21.3 22.1 Depreciation ‐930 ‐1,259 ‐1,551 ‐1,811EBIT 4,834 5,447 6,860 8,782Growth, % 17.7 12.7 25.9 28.0 Margin, % 17.3 17.0 17.7 18.6 Interest paid ‐50 ‐23 ‐23 ‐23Pre‐tax profit 5,379 5,911 7,427 9,476Tax provided ‐1,277 ‐1,389 ‐1,745 ‐2,227Profit after tax 4,102 4,522 5,682 7,249Growth, % 11.6 10.2 25.7 27.6 Net Profit (adjusted) 4,102 4,522 5,682 7,249 Unadj. shares (m) 138 138 138 138 Wtd avg shares (m) 138 138 138 138 Balance Sheet Y/E Mar, Rs mn FY19 FY20e FY21e FY22eCash & bank 892 572 1,197 3,226Debtors 6,618 7,565 9,178 11,141Inventory 5,357 6,228 7,556 9,172Loans & advances 63 71 86 104Other current assets 2,860 3,195 3,765 4,459Total current assets 16,909 18,749 22,900 29,222Investments 70 70 70 70Gross fixed assets 14,864 19,364 23,864 27,864Less: Depreciation ‐3,007 ‐4,266 ‐5,817 ‐7,628Add: Capital WIP 1,828 1,328 828 828Net fixed assets 13,685 16,426 18,875 21,064Total assets 31,548 36,221 42,977 51,679 Current liabilities 8,110 9,058 10,894 13,092Provisions 295 330 399 483Total current liabilities 8,405 9,388 11,293 13,576Non‐current liabilities 289 289 289 289Total liabilities 8,694 9,677 11,582 13,865Paid‐up capital 138 138 138 138Reserves & surplus 22,716 26,407 31,258 37,676Shareholders’ equity 22,854 26,545 31,396 37,814Total equity & liabilities 31,548 36,221 42,977 51,679 Source: Company, PhillipCapital India Research Estimates

Cash Flow /E Mar, Rs mn FY19 FY20e FY21e FY22ePre‐tax profit 5,379 5,911 7,427 9,476Depreciation 930 1,259 1,551 1,811Chg in working capital ‐1,754 ‐1,270 ‐1,777 ‐2,200Total tax paid ‐1,146 ‐1,389 ‐1,745 ‐2,227Cash flow from operating activities 3,410 4,511 5,456 6,860Capital expenditure ‐3,739 ‐4,000 ‐4,000 ‐4,000Chg in investments ‐65 0 0 0Cash flow from investing activities ‐3,328 ‐4,000 ‐4,000 ‐4,000Free cash flow 81 511 1,456 2,860Other financing activities ‐353 ‐583 ‐531 ‐491Cash flow from financing activities ‐496 ‐726 ‐674 ‐634Net chg in cash ‐414 ‐215 782 2,226 Valuation Ratios

FY19 FY20e FY21e FY22ePer Share data EPS (INR) 29.7 32.8 41.2 52.5Growth, % 11.5 10.2 25.7 27.6Book NAV/share (INR) 165.6 192.3 227.5 274.0FDEPS (INR) 29.7 32.8 41.2 52.5CEPS (INR) 36.5 41.9 52.4 65.6Return ratios Return on assets (%) 14.4 13.4 14.4 15.4Return on equity (%) 17.9 17.0 18.1 19.2Return on capital employed (%) 19.1 18.0 19.3 20.6Turnover ratios Asset turnover (x) 1.6 1.4 1.5 1.5Sales/Total assets (x) 1.0 0.9 1.0 1.0Sales/Net FA (x) 2.3 2.1 2.2 2.4Working capital/Sales (x) 0.2 0.2 0.2 0.3Receivable days 85.0 85.0 85.0 85.0Inventory days 68.8 70.0 70.0 70.0Payable days 82.7 80.0 80.0 80.0Liquidity ratios Current ratio (x) 2.1 2.1 2.1 2.2Quick ratio (x) 1.4 1.4 1.4 1.5Interest cover (x) 96.7 235.6 296.7 379.8Total debt/Equity (%) 0.0 0.0 0.0 0.0Valuation PER (x) 38.9 35.3 28.1 22.0Price/Book (x) 7.0 6.0 5.1 4.2EV/Net sales (x) 5.6 4.9 4.0 3.3EV/EBITDA (x) 27.3 23.5 18.7 14.6EV/EBIT (x) 32.6 29.0 22.9 17.7



UPL Ltd (UPLL IN) Becoming a global leader in crop protection INDIA | AGROCHEMICALS | Initiating Coverage

4 September 2019

UPL is becoming an agrochemicals giant: UPL has become the 5th largest player in the world with Arysta’s acquisition with a market share of close to 7%. Its larger presence across regions will aid product‐portfolio expansion and generate faster growth. Its advantages of low‐cost manufacturing plus Arysta’s presence in value‐added products, especially bio‐solutions and seed treatment, will drive revenue and cost benefits. Arsyta to bring value growth with full integration by FY20‐22: Arysta will bring in proven capability in developing new and differentiated products for specialised crops in specific regions by FY20‐22 with multiple synergy benefits, • Wider global footprint: Arysta’s stronger presence in Russia, Eastern Europe, Middle

East, and Africa will support a variety of differentiated products, especially in Europe from where UPL gets is c.14% revenue while Arysta gets c.40%. UPL became the third largest player in the large and fast growing Latin American market, creating better opportunity for faster growth.

• Wider crop solutions: Arysta’s presence in specialty crops such as sugarcane, cereals, cocoa, and fruits and vegetables compared to UPL’s traditional crop presence should bring in multiple sales and marketing opportunities across regions.

• Addition of faster growing product portfolio: There is very limited overlap in the product portfolio of the combined entities (c.US$ 200mn worth) and Arysta’s leading position in seed‐treatment (4th largest) and bio‐solutions (2nd largest in bio‐stimulants) creates big opportunities for better growth. In fact, UPL itself continued to drive growth with a differentiated product offering by increasing innovative rates from 2.5% in FY14 to 19% in FY18, and branded product sales to 90%. UPL will benefit from Arysta’s product offering (bio‐solution/seed treatment).

Multiple revenue and cost synergies to drive growth and margins: UPL’s low‐cost manufacturing facilities (35) across the globe and Arysta’s asset‐light business model (13 formulations plants) should improve efficiencies and margins in FY20‐22. Revenue (US$ 100mn in FY20) and cost synergies (US$ 120mn) benefits will be largely driven by optimising manufacturing, better procurement efficiency, consolidation of infrastructure costs, and other consolidated benefits. Arsyta’s leading position in bio‐solutions and seed treatment to drive long‐term growth: The continuous rise in agrochemicals product development costs and longer duration to market has gradually created opportunities for bio‐solutions products (c.US$ 6bn market), which are growing at 11‐12% compared with single‐digit growth in agrochemicals. Arysta’s strong market presence (2nd largest in bio‐stimulants and 4th largest in seed treatment) in bio‐solutions should support UPL’s long‐term growth. Also, recent concerns about glyphosate usage are likely to benefit UPL with its product offering of Glufosinate, especially in the US market.

Outlook and valuation: We expect UPL’s revenue/EBITDA CAGR at 25%/28% in FY19‐22 led by Arsyta’s integration supporting growth and margins. Poor demand prospects in North America and parts of Europe, and erratic weather in India, remain major risks that are likely to lower growth for UPL in FY20. Domestic peers always traded at a premium to UPL due to their larger focus on the domestic market. Also, UPL always commanded a premium to global peers due to its consistent growth outperformance, but short‐term concerns about demand (H1FY20) and high net debt/EBITDA (post Arysta) are keeping its valuation in check. Global peers such as FMC, BASF, and Nufarm traded at discount to UPL due to their low growth and high operational cost. We assign 9x Sept FY21 EV/EBITDA to arrive at target of Rs 730 (implying 16x Sept FY21 PE). We initiate coverage on UPL with a Buy rating.

BUY CMP RS 553 TARGET RS 730 (+32%) COMPANY DATA O/S SHARES (MN) : 764MARKET CAP (RSBN) : 426MARKET CAP (USDBN) : 5.952 ‐ WK HI/LO (RS) : 709 / 388LIQUIDITY 3M (USDMN) : 44.8PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Jun 19 Mar 19 Dec 18PROMOTERS : 27.9 27.8 27.7FII / NRI : 42.7 40.9 40.6FI / MF : 8.6 9.3 10.2NON PRO : 3.4 3.5 2.9PUBLIC & OTHERS : 17.4 18.6 18.5 PRICE PERFORMANCE, % 1MTH 3MTH 1YRABS ‐2.7 ‐17.3 19.5REL TO BSE ‐1.1 ‐8.4 23.8 PRICE VS. SENSEX

KEY FINANCIALS Rsmn FY19 FY20E FY21ENet Sales 2,18,370 3,50,593 3,86,597EBIDTA 41,110 66,963 78,479Net Profit 22,010 25,057 31,607EPS, Rs 43.2 32.8 41.3PER, x 12.8 16.9 13.4EV/EBIDTA, x 13.2 9.8 8.1P/BV, x 1.6 2.1 1.8ROE, % 16.2 13.1 14.6Debt/Equity (%) 160.3 133.0 106.1


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UPL LTD. INITIATING COVERAGE

About the company • Incorporated in 1969.Earlier know as United Phosphorus (UPL). • Used to make red phosphorus; since then, it has expanded into crop protection

products, seeds, speciality chemicals, and industrial chemicals. It has now transformed into a complete agro‐solutions provider – seeds, crop‐protection, biologicals, soil nutrients, and post‐harvest solutions.

• The world’s second‐largest generic player in agrochemicals after Adama, and after its acquisition of Arysta, it has become the fifth‐largest agrochemicals company in the world.

• Has c.14% market share in the Indian organised crop‐protection market. • One of the most successful integrators of acquired assets. It has made +25

acquisitions across the world over the past two decades. • Has c.50 manufacturing facilities, +10,500 employees, +13,000 registrations, and

a combined revenue of c.US$ 4.7bn after acquiring Arysta Lifesciences. • Its growth has been both organic and inorganic with additions of various

products into its portfolio; it has done more than 25 acquisitions in the past two decades. For organic growth over the past 5 years, its strategy has been to introduce differentiated generic products with limited competition and better margins.

UPL’s multi‐fold growth journey


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2006" Bought Reposo for entry into Argentina2006: Bought Advanta for exposure to seed business

2012: Bought DVA Agro and Sipcam Isagro Brazil for entry into Brazil market2012: Diversification into Manzate fungicide business

2016: Merged with Advanta

2014: Cross revenue of Rs 100 bn and introduce Unizeb Gold2007: Bought Cerexagri for global

distribution network

2010: Bought RiceCo for global sales and marketing network and product offerings to rice market

2005: Bought SWAL for scale and distribution in India

1996: Bought Devrinol for entry into US, Japan and RoW1996: Started caustic chlorine plant

2018: Bought Arysta LifeScience



Geographical breakup • Wide geographical footprint with +6,500 product registrations with advantage of

low cost manufacturing. • 10‐year revenue CAGR of 15% to Rs 199bn in FY19 driven by organic and

inorganic growth. • Latin America and North America contributes c.50% while India and RoW covers

c.33%. • Gained market presence in Europe after the Arysta acquisition (c.25%). Geographical revenue share before and after Arysta

Source: Company, Phillip Capital India Research Product portfolio breakup • Before Arysta: 29% of revenue from herbicides, fungicides and insecticides

covers c.50%. • After Arysta:Herbicides expanded to 30%, and insecticides generates 27% from

25% earlier. Herbicides and Insecticides products portfolio contribute c.50% of revenue

Source: Company, Phillip Capital India Research About Arysta and details of the acquisition In July 2018, UPL acquired Arysta LifeScience Inc for a cash consideration of c.US$ 4.2bn (in its wholly owned subsidiary UPL Corporation Ltd) from Platform Specialty Product Corporation. The transaction was backed by US$ 1.2bn equity investment from ADIA (Abu Dhabi Investment Authority) and TPG Capital for a combined stake of 22% in UPL Corporation. The balance financing of US$ 3bn was funded with debt. Arysta LifeScience was the seventh‐largest agrochemical company in crop protection

Latin America33%

North America18%

Europe13%

RoW36%

UPL revenue share

Latin America36%

North America13%

Europe39%

RoW12%

Arysta revenue share

Latin America34%

North America16%

Europe24%

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Herbicides29%

Fungicides26%

Insecticides25%

Others20%

UPL

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Fungicides17%

Insecticides30%

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Fungicides23%

Insecticides27%

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The American market covers c.50% of UPL’s revenue after its Arysta acquisition. It has increased its Europe share to c.25% from 13% in FY18

+ =

=+



solutions before the acquisition with a good presence in bio‐solution and seed treatment. Holding structure after Arysta


PROMOTERS PUBLIC

C.28% C.72%

C.78%PROMOTERS BANKS

C.22%

100%

Equity infusion of $1.2bn Acquisition Debt: $3bn(International business)



Investment rational Arsyta integration to drive value growth; UPL an agrochem giant now UPL completed the Arysta Lifescience acquisition for US$ 4.2bn from Platform Speciality Products in record time (about 6 months) after signing the deal in July 2018. Arysta is expected to bring in multiple synergies, value additions in terms of products categories and geographical presence, and it will push UPL to the next level of growth. Fifth‐largest agri‐solution provider in the world UPL was the 7th largest agriculture solutions provider with a focus on post‐patent products across crops with product registrations of more 6,000, while Arysta was the 10th largest player with a focus on differentiated and speciality crop focus. With the Arysta acquisition, UPL became the 5th largest player in the world after Bayer+Monsanto, Syngenta, BASF and Dow+Dupont. The larger presence across regions will support UPL in expanding its product portfolio and generate revenue. Post Arysta, UPL became the 5th largest agro‐chem co with a c.7% market share

Source: Company, PhillipCapital India Research,*part of Chemchina Now the 3rd largest player in fast‐growing Latin America UPL regional presence: India, USA, Western Europe, Australia Arysta regional presence: Africa, Russia, Eastern Europe, Middle East, Japan

• Geographical synergy: Arysta’s stronger presence in Russia, Eastern Europe,

Japan/Asia, Middle East, and Africa will support the combined entity in offering a variety of products at competitive prices, especially from UPL’s portfolio. Its larger presence in Europe (c.40% vs. UPL’s c.14%) is likely to help UPL expand and cross‐sell various products. UPL derives c.36% of revenue from RoW (including India) compared with Arysta’s c.12%, indicating significant opportunities for Arsyta’s products in these markets, especially bio solutions and seed treatment products.

• A larger stronger player: UPL went into the top‐5 brackets globally after its Arysta acquisition. However, the acquisition of Arysta made it the 3rd largest player in the fastest growing agri market of Latin America next to Bayer (+Monsanto) and ChemChina (+Adama+Syngenta). UPL’s revenue share in Latin America has gone up to 38% in this market, (from 36% pre‐Arysta), with an upgraded product portfolio (covering bio solutions, seed treatment, etc.), which provides better visibility for faster value growth.

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Arysta’s acquisition strengthens UPL’s revenue share in Latin America

Source: Company, PhillipCapital India Research, FY18 Global market presence of UPL and Arysta


Multiple revenue and cost synergies to drive growth and margins UPL is already an established global player with cost‐effective integrated manufacturing of off‐patent products (both active ingredients and formulations) and strong marketing and distribution. Arysta’s acquisition brings in its proven capability in developing new and differentiated products for specialised crops for specific regions.

33% 36% 34%

18% 13% 16%

13%

39%24%

36%

12%26%

0%

25%

50%

75%

100%

UPL Arysta revenue share UPL+Arysta

RoW

Europe

North America

Latin America

UPL, with Arysta, will have c.7% market share (c.3% earlier). Both have a strong presence in key markets – North and Latin America – but Arysta provides stronger access to Eastern Europe and Russia



Arysta complements UPL in terms of wider geographical reach, product development capabilities, and larger targeted crops UPL Arysta UPL+Arysta Crops focus Rice, F&V (fruits and

vegetables), soybean, cotton, sugarcane, corn

Cotton, F&V, sugarcane, sunflower, cocoa and cereals

UPL’s product offerings are largely concentrated towards traditional crops such as corn, rice, cotton, and soybean while Arysta’s specialty crops are sugarcane, cereals, cocoa, and fruits and vegetables. Hence, the acquisition will expand UPL’s crop portfolio to more specialised crops.

Product focus Seeds to post‐harvest products with good diversification into herbicides, fungicides, insecticides, and seeds

Largely into insecticides, herbicides, bio‐solutions, and seed treatment. In fact, it offer products with differentiated solutions

UPL is offering end‐to‐end products from seeds to post‐harvest, including specialty post‐harvest products. Arysta’s product covers bio‐solutions and seed‐treatment products with a portfolio of herbicides, fungicides, and insecticides. Arsyta is a leading player in the seed‐treatment market (4th largest) and bio‐solutions (2nd largest in bio‐stimulants), which will complement the combined entity and expand its portfolio of products across geographies. There is very limited overlap of product portfolio between two entities (c.US$ 200mn, i.e., just 5% of combined revenue base) considering global presence by UPL.

New product development and registration

Focus on innovative formulations, combinations, mixtures, etc. with expertise in registration across geographies

Late‐stage development capabilities and strong relationships with innovators for supplying AIs

Arysta UPL will able to leverage access to new AIs and support for development of new‐product formulations, combinations, mixtures, and strategies.

Source: Company, PhillipCapital India Research UPL+Arysta’s integrated portfolio to target key crops in major markets Crops UPL exposure Arysta exposure UPL+Arysta Fruits and vegetables Fruit and vegetables Fruit and vegetables Europe, Brazil and the US Cotton Cereals Cereals and cotton Europe and Brazil Rice Cocoa Rice and cocoa Asia and Brazil Sugar beet Sugarcane Sugar beet and sugar cane Europe, Asia and Brazil Tree nuts and aquatics Sunflower Tree nuts, aquatics and Sunflower North America Corn Corn Corn Brazil and the US Soybean Soybean Soybean Brazil and the US

Source: Company, PhillipCapital India Research Herbicides and insecticide products will continue to dominate post Arysta for UPL


29% 34% 31%

26% 17% 23%

25% 30% 27%

0%8% 3%

20%11% 16%

0%

25%

50%

75%

100%

UPL Arysta UPL+Arysta

Others

Bio solution

Insecticides

Fungicides

Herbicides

Arysta has powered UPL’s revenue share in the fast growing segment of herbicides – to 31% from 29% earlier



Manufacturing presence across the world to earn revenue/cost synergies UPL Arysta UPL+Arysta Manufacturing and formulations

Low cost manufacturing of AIs and formulations. 14 AIs, 14 formulations, and 7 seeds facilities

Asset‐light model with larger focus on outsourcing (close to customer approach). 13 formulations facilities.

UPL’s larger low‐cost manufacturing facilities will complement Arysta’s asset‐light business model, especially in Asia and Africa, which will improve margins and efficiencies. The combined product registration increased to 13,000+ (UPL 6,500+ and Arsyta 5,800+) with a portfolio of specialty crops and addition of bio‐solutions and seed‐treatment businesses. Arysta’s strong R&D platform will support growth and product development

Revenue synergies UPL is expecting revenue synergy of US$ 100mn in FY20 and US$ 350mn in subsequent years, led by complementary portfolio of products, mainly access to specialised crops. Also, both entities can leverage cross‐selling products, which should improve sales.

Cost synergies Cost synergies are expected to be +US$ 120mn in the first year (FY20) and +US$ 200mn in subsequent years. These will be driven by optimising manufacturing, better procurement efficiency, increasing R&D efficiency, consolidation of the IT platform by lower IT infrastructure cost and other consolidated benefits.

Source: Company, PhillipCapital India Research UPL‐Arysta: Revenue/cost synergy of US$ 350/200mn in the 3rd year of integration

Source: Company, PhillipCapital India Research Worldwide manufacturing presence to support synergy benefits


100

350 +

120 +

200+

‐

50

100

150

200

250

300

350

400

Year 1 Year 3

US$mn

Revenue Cost



Minimum overlap in the business model to benefit UPL


Arsyta’s lead in bio‐solutions, seed treatment to drive long‐term growth In the recent years, the rate of introduction of new AIs corrected sharply to c.40 in 2000‐10 from c.100 in the previous decades. This was due to higher development costs of more than US$ 200mn per active ingredient and an elongated timeline of 10‐11 years. Hence, bio‐solutions products have emerged as the new area of growth in the global agri‐solutions market. The bio‐solutions market was estimated at US$ 6bn in CY17 (c.11% of the global agrochemicals market) and it is growing faster (at 11‐12%) than agrochemicals market growth of low to mid‐single‐digits. Incidentally, Arysta is the second‐largest global bio‐stimulant player with a strong portfolio of 700 highly differentiated bio‐stimulants, innovative nutrition (bio‐fertilisers), and bio‐control (bio‐pesticides) products. Arysta’s products in bio‐stimulants includes Biozyme (for fruits and vegetables) and Atonik (stimulates natural plant processes, allowing the full expression of the plant’s genetic potential, especially under stress conditions). Moreover, the bio‐solution markets in Latin America (where UPL has larger presence) are showing rapid development, as farmers' acceptance of these products is increasing. As per the Brazilian Association of Biological Control Companies (ABCBio), Brazil’s bio‐pesticides market registered a growth 77% to BRL 464.5mn (BRL = Brazilian real) in 2018.

According to Phillips Mc Dougall (agro‐chem consultancy), there are about 300 bio‐pesticide active substances and organisms, including natural substances, products from fermentation, microbes, and pheromones. In recent years, interest of innovators, generic players and many small‐ and medium‐sized agrochemicals companies has increased substantially due to limited regulatory requirements, farmers’ interest towards products with growing integrated pest‐management globally. Bio‐pesticides sales have grown almost 30 times since early 1990s to about US$ 3bn with a share of about 6% in the global crop‐protection market. UPL’s seed‐treatment market is also expected to grow faster with Arysta’s portfolio. In 2018, seed treatment was c.US$5bn in 2018. It is likely to see a CAGR of 11‐12% until 2025, providing a better opportunity for revenue expansion.

UPL’s cost‐effective manufacturing and Arysta’s specialty crop focus to drive revenue as well as cost synergies

Arysta’s strong presence in bio‐solutions and seed treatments to drive faster value growth for UPL

We believe Arysta’s acquisition has aligned UPL’s product portfolio to the revolutionary trend of bio‐solutions and it should drive faster value growth for the company



The bio‐solutions market Structure of the bio‐solutions market

Source: Industry, PhillipCapital India Research Bio‐solution products are derived from natural resources and with differentiated technology and mixtures and are also protected by trade secrets. Arysta’s bio‐solutions business divisions Bio‐stimulants • These (biological stimulants) products stimulate crop vigour, yield, and quality. • Major products include Biozyme, BM Start, and Appetizer. • These products can provide significant value to growers, given their

differentiated ability to increase yield at relatively low costs. • Market size is estimated at US$ 1.8‐2bn in 2016/17; likely to reach US$ 4‐5bn by

2023/24. Products: Acid‐based products (based on fulvic, humic, amino acids) under biostimulants have an estimated share of about 40‐50% of the total market. Seaweed extracts products have 25‐30% share. Application: Foliar treatment application covers the major share of product application at 70‐80%. Regional penetration: Europe is the largest market for usage of products at 35‐40% of the total bio‐stimulants market, due to favourable regulations and awareness towards organic food production. Long‐term growth is likely from Asia/South America (India/China/Brazil) due to changing food consumption habits, climate change (changes in crop mix), and rising income levels. Key players: BASF, Isagro, Sapec Group, Valagro Group, Novozymes, Biolchim, Arysta. Bio‐stimulant market structure


BIOLOGICAL PRODUCTS

Biofertilizers BioStimulants Biological Control Products

BIOSTIMULANT MARKET

By Type

– Acid‐based‐ Humic Acid‐ Fulvic Acid‐ Amino Acid__________________

– Extract‐based‐ SeawoodExtracts‐ Other Plant Extracts

__________________

– Others

By Corp Type

– Row crops and cereals__________________

– Fruits & Vegetables__________________

– Turf & Ornamentals__________________

– Others Crops

By Application

– Foliar__________________

– Soil__________________

– Seed

By Geography

–North America__________________

– Europe__________________

– Asia‐Pacific__________________

– LAMEA



Bio‐control (biological) products These products (bio‐control/bio‐pesticides products) are usually used for crop protection and are derived from natural sources such as plants, bacteria, and minerals. They target specific pests and are less toxic than synthetic pesticides; as a result, they are particularly well accepted by organic farmers and largely used in specialty crops such as fruits and vegetables (80‐90%). Arysta’s portfolio mainly includes bio‐fungicides and bio‐insecticides. Products: Bio‐pesticide products mainly cover bio‐chemicals (semio‐chemicals/organic acids from plant extracts), microbials (from bacteria, fungi, virus, protozoan, yeasts) and macro organisms (products for insects, mites, nematodes). In terms of product usage, bio‐insecticides and bio‐fungicides have almost 85‐90% consumption share of bio‐pesticide, while others such as bio‐herbicides, bio‐nematicides, etc., have 1‐5%. Market size: Bio‐control market size (global) is estimated to be US$ 3.0‐3.5bn in 2016/17 with a share of about 6% in total agrochemicals. Bio‐control market is likely to reach US$ 4‐5bn by 2024/25. In terms of categories, Microbials products have about 50% share of total market globally while bio‐chemicals products have 30%. Regional penetration: Europe and North America each have about 35% market share of what in terms of bio‐control products. Long‐term growth is expected from Latin America and Europe with increasing usage and stringent regulation towards conventional products. Key players: Bayer, BASF, Syngenta, Dowdupont, FMC, Arysta, Novozymes, Andermatt Biocontrol, and Kenogard. Innovative nutrition (bio‐fertilisers) • Innovative nutrition products (mainly bio‐fertilisers) enhance nutrient availability

or use efficiency by optimising nutrition in plants. • Bio‐fertiliser contains living micro‐organisms (bacterial, fungal), which support

crops to receive nutrients and improves crops yield and quality. • Innovative products are mainly developed to boost nutrient solubility in soils and

crops, which reduces stress on arable land. Products: Bio‐fertiliser products used to enhance plant nutrient uptake from soil. Products are largely categorised into nitrogen (N) fixing, potassium (K) mobilisation, phosphate (P2O5) solubilising and others. Globally, N‐fixing products cover a large share of 60‐70% of consumption of bio‐fertilisers followed by phosphate solubilzers with an estimated share of 15‐20%. Application: Globally, seed‐treatment covers a major share of application (60‐65%) for bio‐fertilisers (coating of bio‐fertilisers with seeds). Soil treatment application covers the balance usage. Market size: Bio‐fertiliser market is estimated to be valued at US$ 1.0‐1.2bn in 2016/17 and expected to reach a CAGR of 13% by 2023/24 driven by government support (promoting usage) for better farm practices (organic food production). Regional penetration: North America and Europe cover close to 50‐60% of the world’s bio‐fertiliser market, but rising income levels in India/China/Brazil provide larger growth in these markets. Key players: Highly fragmented market with large number of small and marginal players across the globe. CBF China Biofertilizers AG and Novozymes, Lallenmand Inc, Agrinos AS, Monsanto BioAg, Arysta.

World’s bio‐solutions market to see 11% CAGR Market size* (US$bn) Expected market size* (US$bn) CAGR^ Biostimulants 1.8‐2.0 3.5‐4.0 12% Biofertilisers 1.0‐1.2 2.0‐2.5 13% Biocontrol 3.0‐3.2 5.2‐5.5 10% Total 5.8‐6.4 10.7‐12.5 11%

Source: Industry, PhillipCapital India Research, *Estimated for 2016/2017, **Estimated for 2023/2024 from various sources. ^CAGR during 2016/2017 to 2023/2024.



Well‐integrated management to drive synergy growth • The management teams of the two companies UPL and Arysta – are as well

integrated as the actual businesses. • UPL derives new expertise from Arysta’s management. • Mr Diego Casannello, CEO of Arytsa was appointed at COO of the new

management team. • The other members of Arytsa are:

o Ms Paula Pinto (Global Head Strategic Alliance). o Mr Rico Christensen (Chief Marketing Officer). o Mr Fabio Torretta (Regional Head for Brazil). o Mr Hisaya Kobayashi (Regional Head Asia). o Mr Marcel Dreyer (Regional Head AMEANZ).

• Arysta’s team is expected to drive synergy benefits in terms of revenue and cost in the coming years, especially in bio‐solutions and seed‐treatment products.

Management team after Arysta

Source: Company, PhillipCapital India Research UPL’s successful track record of integrating +25 acquisitions over two decades provides confidence that Arysta’s integration will be successful Year Some of the UPL’s acquisitions Comments 1994 MTM Agrochemical, UK First global acquisition in UK by entering into European market and herbicide portfolio. 1996 Devrinol, US Entry into the US and Japanese market 2005 Cequisa, Spain Entry into Spain crop protection market by buying distributor and registrant 2005 SWAL, India Increasing presence in India with access to southern region 2005 Reposo, Argentina Buying formulator and distributor in Argentina 2006 Cerexagri, France A deal of Rs 6bn to become 3rd largest generic player with access to fungicide products and manufacturing. 2006 Advanta Ltd, India Access to seeds portfolio business 2007 ICONA, Argentina Bought formulator and distributor in Argentina to have larger market access in Argentina 2008 Evofarms Group Bought major marketing and distributing company for generic products 2010 RiceCo, US Helped UPL to leverage sales and marketing network with product offering in global rice market. RiceCo has

product offering based on herbicides segments. 2010 Manzate Fungicide business Helped UPL to have segment diversification with mancozeb fungicide business of Dupont 2011 DVA Agro, Brazil Entry into Brazil market with access to formulation, marketing and selling of crop protection products 2011 Sipcam Isagro Brazil, Brazil Products and distributor of agrochemicals – access to Brazil market 2012 SDAgrichem Netherlands Access to production, marketing and selling of crop protection products in the European market

Source: Company, Industry, PhillipCapital India Research



UPL to play a crucial role in the entire crop‐life‐cycle across the world With the Arysta acquisition, UPL has already attained the end‐to‐end global agri input presence with a leadership position in terms of cost‐effectiveness in manufacturing, integrated generic agri‐input manufacturing and marketing, patented and proprietary inputs, seeds, and seed treatment. Given its global leadership UPL is all set to enter crop‐life‐cycle relationships and food‐chain‐partnership for secular long‐term growth. UPL is moving towards version 4.0


Innovation rate has consistently increased • UPL’s innovation rate (which means the contribution of new launches) has

consistently increased – from 2.5% in FY14 to 19% in FY18 – driven by the introduction of brands that have gone on to become successful. These include Tripzin, Moccasin, Sperto, Triziman, Macarena, and Gainexa FC.

• Its branded sales increased from c.75% in FY11 to c.90% in FY18 with better product offering and new varieties of products across the regional market.

• The reach of its combination products such as Mancozeb (which have greater effectiveness) and Glufosinate (because of increasing resistance for older herbicides such as Glyphosate and 2,4D) is increasing.

• Arysta’s differentiated product basket – with proprietary bio‐solution products and capability to develop new products for unmet demand – will drive UPL’s premium product play and hence value growth.

Innovation rate continues to remain high with the introduction of new products

Source: Company, PhillipCapital India research

2.5%

5.0%

14.0%15.0%

19.0%

0%2%4%6%8%

10%12%14%16%18%20%


UPL’s targets crop life‐cycle relationships and food‐chain partnerships for secular long‐term growth

UPL’s innovation rate has consistently increased over the last five years. Arysta’s new products development capacities will boost it further



Branded product revenue share remains close to 90%

Source: Company, PhillipCapital India research UPL’s key brands and products across geographies Particulars Latin America North America Europe RoW India Key products category/brands

Insecticides – Lancer, Lancer Gold, Imida Gold Herbicides – Zartan, Danado, Clorim Fungicides – Unizeb Gold, Unizeb Glory, Unizeb, Vondozeb

Insecticides – Banter Herbicides – Interline, UltraBlzer, Satellite, Tricor and Surflan Fungicides – Cuprofix, Manzate, Microthial and SuperTin Crop nutrition / Fumigants and storage – Weevilcide

Herbicides – Devrinol, Metafol and BeetUP Fungicides – Cuprofix, Microthial and Penncozeb

Insecticides – Kinalux Herbicides – Asulox Fungicides – Penncozeb Crop nutrition / fumigants and storage – Quickphos

Insecticides – Ulala, Phoskill, Lancer Gold, Atabron and Starthene Herbicides – Saathi, Iris, Patela and Lagam Fungicides – Saaf, Avancer Glow, Disect and Cuprofix Crop nutrition / fumigant and storage Wuxal

Products introduced (FY19)

Total ‐ 226 Herbicides – 72 Fungicides – 63 Insecticides – 75 Seed treatment – 6 Adjacent technology ‐ 10

Total – 50 Herbicides – 27 Fungicides – 8 Insecticides – 8 Seed treatment – 6 Adjacent technology ‐ 1

Total – 207 Herbicides – 89 Fungicides – 68 Insecticides – 44 Adjacent technology ‐ 6



Revenue share* (FY19)

36% 18% 14% 17% 17%

Source: Company, PhillipCapital India Research, *UPL (ex Arysta) Number of product registrations

Source: Company, Phillip Capital India Research,*13,000+ registration

70%

75%

80%

85%

90%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19*

Arysta UPL



Key driver for UPL’s US sales: Glufosinate replacing Glyphosate • North America is the major market for herbicides (about two third of

consumption). Post Arysta, UPL derives c.16% of revenue from the North American market and Glufosinate (a herbicide) remains one of its key products.

• We believe Glusofinate will gain market share gradually with increasing concerns about the usage of Glyphosate on the environment and on health. In a recent case of Monsanto/Bayer’s product, RoundUp (Glyphosate herbicide) was claimed to be causing cancer for users. Many countries have expressed concerns about using Glyphosate. Farmers are also not happy with the product since Glyphosate (largest product in the agrochemicals market) usage is not showing the desired results as weeds have gradually been found resistant to glyphosate.

• Glyphosate (a non‐selective herbicide) is currently the largest herbicides molecule (c.US$5bn) in the world. However, since it has been widely used over 40 years, weeds have begun to show resistance to it.

• Glufosinate is complex to manufacture with 10+ manufacturing cycles compared to 4‐5 in Glyphosate. Also, there is limited competition from China, creating better opportunities for existing players such as UPL.

• Glufosinate market was estimated at US$ 0.7‐1.0bn in 2017 and is expected to grow at faster pace in coming years (estimated at US$ 2.0‐2.5bn by 2023), considering rising resistance in weeds for various popular molecules including Glyphosate.

• So far, there is no official ban or restriction on the usage of Glyphosate in regions such as such as Europe, Asia, and America. However, we believe that ongoing concerns about its effects on the environment and on health, plus increasing resistance in weeds, will reduce its usage in the coming years, creating opportunities for other molecules such as Glufosinate.



Financial performance UPL’s revenue CAGR has been 15% in the past decade with a combination of organic and inorganic growth. We expect its revenue CAGR at c.25% in FY19‐22 (pre and post Arysta) mainly led by Arysta’s integration supporting higher growth. We expect revenue to increase by 9.5% and 10.3% for FY20 and FY21 with a recovery in the global crop‐protection market relative to three years ago. We expect slower growth in FY20 considering demand concerns mainly in North America (erratic weather and trade war with China), India (slow start and recovery), and Europe (mixed weather pattern across regions). Arysta to drive future growth after full integration by FY20‐22

Source: Company, PhillipCapital India Research Revenue growth assumption and contribution across the regions after Arysta Regions FY19* FY20E FY21E Rs bn India 33.0 32.4 34.3 % share 10% 9% 9% yoy % ‐2% 6% Latin America 114.0 142.5 168.2 % share 36% 41% 44% yoy % 25% 18% North America 50.2 52.8 56 % share 16% 15% 15% yoy % 5% 6% Europe 73.3 68.9 70.3 % share 23% 20% 18% yoy % 6% 2% RoW 47.0 51.4 55.0 % share 15% 15% 14% yoy % 9% 7% Revenue (UPL+Arysta) 318 348 384

Source: PhillipCapital India Research, *Estimated post Arysta for 12 months

‐

10

20

30

40

50

60

70

‐

50

100

150

200

250

300

350

400

YoY %

Revenu

e (Rs b

n)

Arysta UPL YoY %

Arysta’s complete integration in FY20

We expect revenue CAGR of 25% in FY19‐22 with benefits from Arysta integration and gradual recovery in global demand



Margins set to rise to c.21% by FY22 with cost/revenue synergies post Arysta

Source: Company, PhillipCapital India Research Better‐than‐industry growth should continue post Arysta • After Arysta’s acquisition, UPL’s market share is close to 7% in the global crop

protection market. • It now competes with large innovators such as Bayer, BASF, Syngenta and Dow‐

Dupont. • UPL has consistently outperformed overall industry growth and regional growth

over the past decade, driven by strong manufacturing capabilities and global presence with multiple products offering for various crops.

• UPL’s growth has remained in double digits (except in FY18); this, while the global crop protection market grew in single digits or was negative (in FY16/17). UPL outperformed the industry in FY12‐17 in terms of regional growth with double‐digit CAGR in India, North America, Latin America, RoW, and Europe.

UPL consistently outperformed industry growth

Source: Company, PhillipCapital India Research, yoy growth %, Industry growth on CY basis

16 17 17

18 18

19 19 20

20 21

21

‐10 20

30 40

50 60 70

80 90

100

EBITDA

Margin %

Revenu

e (Rs b

n)

EBITDA EBITDA Margin %

Margin dip was witnessed with iexceptional cost

‐10%

‐5%

0%

5%

10%

15%

20%

25%

30%

35%

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Global crop protection market UPL

Arysta’s integration will bring in multiple synergy benefits leading to better margins by FY22



UPL beat industry growth in all markets

Source: Company, PhillipCapital India Research,*FY12‐17 CAGR Arysta buyout increased net debt/EBITDA; but it will fall below 2x by FY22

Source: Company, PhillipCapital India Research Working capital cycle to improve after Arysta’s integration in FY20‐22


‐5%

0%

5%

10%

15%

20%

25%

Europe India North America RoW Latin America

UPL Industry

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

‐

50

100

150

200

250

300

FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Net Deb

t/EB

ITDA

Debt/EBITD

A Rs bn

Net Debt EBITDA Net debt/EBITDA

‐

50

100

150

200

250

FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Days

Debt will reduce by Rs 30‐35bn in FY20‐22. Net debt/EBITDA ratio will fall to c.2x. Working capital requirement will reduce to c.120 days by FY21 and FY22 with Arysta’s integration



Arysta’s acquisition put return ratios under pressure; to improve by FY20‐22


Arysta integration to bring down debt by FY22


Outlook and valuation • UPL has transformed its business operation from being an industrial chemical

producer to becoming the fifth largest agrochemicals company in the world with expertise in low‐cost manufacturing for off‐patent products, largely in exports.

• Arysta’s acquisition has synergies for both companies and help UPL to expand its business growth in coming years. The integration process is progressing well and we expect full benefits to start coming in by FY20.

• High debt/EBITDA will gradually reduce towards pre Arysta level with reduction in debt.

• The key risks are slowdown in demand in key regions (low planting areas in the USA due to erratic weather), slower integration process, and limited synergy benefits from Arysta.

Valuation We expect UPL’s revenue/EBITDA CAGR of 25%/28% respectively in FY19‐22 led by Arsyta’s integration supporting growth and margins. Poor demand prospects in North America and parts of Europe, and erratic weather in India remain major risks that are likely to lower growth for UPL in FY20. However, we expect its consistent outperformance compared to the industry to support growth outlook in coming years. We expect UPL’s growth will be led by: (1) differentiated product mix, (2) better geographical presence, (3) value‐added products portfolio (bio‐solutions), and

0

5

10

15

20

25

30

FY17 FY18 FY19 FY20E FY21E FY22E

%

ROE ROCE

0.0

0.5

1.0

1.5

2.0

2.5

‐400

‐300

‐200

‐100

0

100

200

300

400

FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Debt/equ

ity (x)

Cape

x, Op cashflo

w, deb

t (rs bn)

Capex Op cashflow Debt Debt/equity



(4) successful track record of integrating businesses. UPL is best placed among Indian peers as it has major revenues from exports with a well‐diversified presence across the globe. Domestic peers face uncertainty due to erratic rainfall and raw‐material availability from China. On relative comparison, domestic peers always traded at premium to UPL due to better growth in good season, focussed market and stronger regional presence. However, UPL is driving major revenue from exports by having wider global presence and therefore comparing with global peers provides better valuation comparison. Global peers such as FMC, BASF, and Nufarm traded at discount to UPL due to their low growth and high operational cost. We assign 9x Sept 2021 EV/EBITDA to arrive at target of Rs 730 (implying 16x Sept FY21 PE). We initiate coverage on UPL with a Buy rating. Peers analysis Revenue PAT ROE (%) PE (x) EV/EBITDA (x) Companies CAGR

(FY15‐19) CAGR

(FY15‐19) FY19 FY19 FY20E FY21E FY19 FY20E FY21E

Indian Peers UPL 16% 6% 12.2 19.9 17.1 13.4 7.5 6.7 8.6PI Industries 10% 14% 19.5 38.9 35.3 28.1 27.5 23.7 18.8Excel Crop Care 4% 6% 14.2 39.8 Na Na 29.0 Na NaRallis India 2% 0% 12.5 19.5 16.1 13.8 12.9 10.0 8.3ShardaCropchem 17% 9% 14.6 16.2 13.5 11.2 9.2 6.0 5.1DhanukaAgritech 6% 1% 17.7 23.0 25.7 29.5 12.6 10.3 9.0Insecticides India 5% 22% 20.3 59.4 60.7 71.4 8.9 7.8 6.9Global Peers Revenue PAT ROE (%) PE (x) EV/EBITDA (x) Companies CAGR

(CY14‐18) CAGR

(CY14‐18) CY2018 CY18 CY19E CY20E CY18 CY19E CY20E

Bayer AG ‐4% ‐19% 4.0 14.6 9.1 8.0 12.7 8.6 7.8 BASF SE ‐7% ‐5% 13.6 11.3 13.6 11.7 8.0 8.9 7.8 FMC 10% 13% 17.2 13.3 14.7 12.4 11.8 11.8 10.8 Nufarm 1% Na ‐1.7 22.0 28.8 17.1 13.3 8.4 7.0

Source: Company, Bloomberg, PhillipCapital India Research, Consensus estimates

PE band EV/EBITDA Band

Source: Bloomberg, PhillipCapital India Research

4x

8x

12x

16x

0

100

200

300

400

500

600

700

800 Rs

4x

8x

12x

16x

0

200000

400000

600000

800000

1000000

1200000

1400000 Rs mn



Financials

Consolidated Income Statement Y/E Mar, Rs mn FY19 FY20e FY21e FY22eNet sales 2,18,370 3,50,593 3,86,597 4,22,198Growth, % 26 61 10 9Raw material expenses ‐1,09,040 ‐1,77,050 ‐1,90,206 ‐2,06,877Employee expenses ‐20,950 ‐35,761 ‐39,433 ‐42,642Other Operating expenses ‐47,270 ‐70,820 ‐78,479 ‐85,706EBITDA (Core) 41,110 66,963 78,479 86,973Growth, % 16.9 62.9 17.2 10.8Margin, % 18.8 19.1 20.3 20.6Depreciation ‐9,690 ‐22,278 ‐23,683 ‐24,429EBIT 31,420 44,686 54,797 62,543Growth, % 10.6 42.2 22.6 14.1Margin, % 14.4 12.7 14.2 14.8Interest paid ‐9,580 ‐10,726 ‐11,097 ‐9,188Other Non‐Operating Income 2,400 1,753 1,933 2,533Non‐recurring Items ‐7,540 ‐1,500 0 0Pre‐tax profit 16,840 34,353 45,772 56,029Tax provided ‐1,650 ‐6,500 ‐8,670 ‐10,619Profit after tax 15,190 27,852 37,102 45,410Others (Minorities, Associates) ‐720 ‐4,295 ‐5,495 ‐6,609Net Profit 14,470 23,557 31,607 38,801Growth, % (1.4) 13.8 26.1 22.8Net Profit (adjusted) 22,010 25,057 31,607 38,801Unadj. shares (m) 510 765 765 765Wtd avg shares (m) 510 765 765 765 Balance Sheet Y/E Mar, Rs mn FY19 FY20e FY21e FY22eCash & bank 28,510 32,322 32,832 32,047Debtors 1,18,120 1,20,066 1,32,396 1,44,588Inventory 92,700 1,05,658 1,16,509 1,27,238Loans & advances 510 819 903 986Other current assets 30,080 42,601 46,448 50,252Total current assets 2,69,920 3,01,466 3,29,088 3,55,110Investments 7,060 7,060 7,060 7,060Gross fixed assets 2,98,620 3,18,252 3,38,324 3,48,989Less: Depreciation ‐1,30,110 ‐1,52,388 ‐1,76,070 ‐2,00,500Add: Capital WIP 17,830 18,000 19,000 19,000Net fixed assets 1,86,340 1,83,865 1,81,253 1,67,490Total assets 6,30,480 6,59,551 6,84,562 6,96,820 Current liabilities 1,55,640 1,87,603 2,06,257 2,07,351Provisions 200 200 200 200Total current liabilities 1,55,840 1,87,803 2,06,457 2,07,551Non‐current liabilities 2,94,610 2,70,110 2,45,610 2,17,610Total liabilities 4,50,450 4,57,913 4,52,067 4,25,161Paid‐up capital 1,020 1,530 1,530 1,530Reserves & surplus 1,45,430 1,62,373 1,87,875 2,20,571Shareholders’ equity 1,80,030 2,01,638 2,32,495 2,71,660Total equity & liabilities 6,30,480 6,59,551 6,84,562 6,96,821 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY19 FY20e FY21e FY22ePre‐tax profit 24,380 35,853 45,772 56,029Depreciation 9,690 22,278 23,683 24,429Chg in working capital ‐1,89,050 4,229 ‐8,458 ‐25,714Total tax paid 23,540 ‐6,500 ‐8,670 ‐10,619Cash flow from operating activities ‐1,31,440 55,859 52,327 44,125Capital expenditure ‐1,42,790 ‐19,802 ‐21,071 ‐10,666Chg in investments 3,280 0 0 0Cash flow from investing activities ‐1,39,370 ‐19,662 ‐20,931 ‐10,526Free cash flow ‐2,70,810 36,197 31,395 33,599Equity raised/(repaid) 0 510 0 0Debt raised/(repaid) 2,05,100 ‐24,500 ‐24,500 ‐28,000Dividend (incl. tax) ‐4,070 ‐6,105 ‐6,105 ‐6,105Other financing activities 36,820 ‐2,010 0 0Cash flow from financing activities 2,70,520 ‐32,245 ‐30,745 ‐34,245Net chg in cash ‐290 3,952 650 ‐646 Valuation Ratios

FY19 FY20e FY21e FY22ePer Share data EPS (INR) 43.2 32.8 41.3 50.7Growth, % (1.4) (24.1) 26.1 22.8Book NAV/share (INR) 353.0 263.6 303.9 355.1FDEPS (INR) 43.2 32.8 41.3 50.7CEPS (INR) 76.9 63.8 72.3 82.7DPS (INR) 8.0 8.0 8.0 8.0Return ratios Return on assets (%) 5.5 5.7 6.9 7.3Return on equity (%) 16.2 13.1 14.6 15.4Return on capital employed (%) 7.6 7.7 9.7 10.5Turnover ratios Asset turnover (x) 1.1 1.2 1.3 1.4Sales/Total assets (x) 0.5 0.5 0.6 0.6Sales/Net FA (x) 1.8 1.9 2.1 2.4Working capital/Sales (x) 0.4 0.2 0.2 0.3Working capital days 143 85 85 100Liquidity ratios Current ratio (x) 1.7 1.6 1.6 1.7Quick ratio (x) 1.1 1.0 1.0 1.1Interest cover (x) 3.3 4.2 4.9 6.8Dividend cover (x) 5.4 4.1 5.2 6.4Total debt/Equity (%) 160.3 133.0 106.1 75.2Net debt/Equity (%) 144.5 117.0 91.9 63.4Valuation PER (x) 12.8 16.9 13.4 10.9Price/Book (x) 1.6 2.1 1.8 1.6EV/Net sales (x) 2.5 1.9 1.6 1.4EV/EBITDA (x) 13.2 9.8 8.1 6.8EV/EBIT (x) 17.3 14.7 11.6 9.5



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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%.

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Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

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research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

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1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No



Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

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