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1January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 1
Rallis IndiaInitiating Coverage
Sageraj Bariya
Tel: 022 - 4040 3800 Ext: 346
E-mail: [email protected]: Company, Angel Research; Note: * Adjusted for exceptional item.
Key Financials (Consolidated)Y/E March (Rs cr) FY2008 FY2009 FY2010E FY2011E
Net Sales 674.6 836.7 946.9 1,087.3
% chg 9.4 24.0 13.2 14.8
Adj. Net Profit 43.6 64.3 74.2 99.4
% chg 1,752.2 47.4 15.4 33.9
Adj. FDEPS (Rs) 36.4 53.6 61.9 82.9
EBITDA Margin (%) 8.8 13.3 14.0 15.1
P/E (x) 20.2 13.7 11.9 8.9
RoE (%)* 16.6 19.6 21.9 26.7
RoCE (%) 13.0 22.4 22.5 25.8
P/BV (x) 4.0 3.4 2.7 2.1
EV/Sales (x) 1.3 1.0 1.0 0.8
EV/EBITDA (x) 14.6 7.4 7.3 5.4
Stock Info
ACCUMULATEPrice Rs735
Target Price Rs796
Investment Period 12 months
‘Rallis’ onRallis India (RAIL), a Tata Group company, is the second largest player in the domesticPesticide market. RAIL had undertaken a restructuring exercise post FY2004, which resultedin RAIL clocking all-time high EBITDA Margins in FY2009. Going ahead, we expect ContractManufacturing (CM) to drive the company's next level of growth particularly with its new plantcoming on stream by June 2010. We estimate RAIL to register a CAGR of 14% and 24.3%in Net Sales and Profit over FY2009-11E, respectively. At Rs735, the stock is trading at8.9x FY2011E Earnings and 5.4x FY2011E EV/EBITDA. Historically, RAIL has traded in the3-11x one-year forward PE band, and at an average 8x over the last couple of years. Goingahead, on account of improving Return Ratios and higher Net Profit growth, we expect thestock to trade at higher valuations than its historical average. We Initiate Coverage on thestock with an Accumulate rating and Target Price of Rs796.
Set to seize rising opportunities in the Domestic Pesticides market: India's overallpesticides consumption is one of the lowest in the world, and we believe that RAIL iswell-placed to seize this opportunity on the back of its wide distribution network, strongbrands and robust new product pipeline. According to industry estimates, the unorganisedmarket accounts for another 50% of the industry. Nonetheless, we believe that RAIL is in aposition to wrest marketshare as well as charge a premium for its products.
Exports to register steady growth: Closing down of capacity in China before theOlympics 2008 and MNCs diversifying their base to India had resulted in the company’sExports spiking 80% in FY2009 to Rs295cr. The scenario has however changed post theOlympics and many closed capacities have come on stream. Slowdown in the global economyhas also resulted in sluggish demand the worldover. Against this backdrop, we estimateRAIL to post a decent CAGR of 17.7% in Exports over FY2009-11E.
Contract manufacturing to be next growth driver: RAIL plans to focus on CM forExports and selectively target and supply to the top players. To facilitate the same, thecompany is setting up a new plant at Dahej. Overall, RAIL targets to achieve cumulativeRevenues of Rs1,000cr over the next five years from this Segment alone.
Sector Agrichemicals
Market Cap (Rs cr) 880
Beta 0.4
52 Week High / Low 809/280
Avg Daily Volume 8547
Face Value (Rs) 10
BSE Sensex 15,191
Nifty 4,502
Shareholding Pattern (%)
Promoters 45.2
MF / Banks / Indian FIs 31.8
FII / NRIs / OCBs 5.2
Indian Public / Others 17.8
Abs. 3 m 1yr 3yr
Sensex (%) 38.4 11.4 46.7
Rallis India (%) 38.1 77.0 195.6
BSE Code 500355
NSE Code RALLIS
Reuters Code RALL.BO
Bloomberg Code RALI@IN
2January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 2
Rallis India
Agrichemicals
Company Overview
Second largest Pesticide player
RAIL is one of the oldest and second largest pesticide agrichemical companies in the countrywith a marketshare of around 13% and belongs to the Tata Group. The company also has acredible presence in the international market. Pesticide accounts for 97% of the company'sTotal Revenues, while plant nutrients, seeds and leather chemicals constitute the balance.Historically contribution from the Domestic business has stood at 77% levels while Exportsaccounted for the balance.
Source: Company, Angel Research; Note - AI - Active Ingredients, CM - Contract Manufacturing
Exhibit 1: Sales Mix and Break-up
90
92
94
96
98
100
FY2007 FY2008 FY2009
Sales Mix (%)
Pesticides Nutrients Seeds Chemicals
Domestic -
Branded
55%
Export-CM
13%
Export-bulk
12%
Export-
Branded
10%
Domestic -
AI 10%
Sales Break up (%) for FY2009
Product break up
Paddy and Cotton are the two largest contributors to RAIL's Revenues, which is in line with theagrichemical consumption of the country wherein the two crops dominate the consumption. Interms of types of pesticides, Insecticides dominate the company's Revenue share with acontribution of almost 70%, followed by Fungicides and Herbicides, which contribute 20% and10% of the company's Total Revenues, respectively.
70%
20%
10%
Insecticides Fungicides Herbicides
Source: Company, Angel Research
Exhibit 2: Pesticides Sales break up (%)
Pesticide accounts for 97% ofthe company's Total Revenues
Insecticides dominate thecompany's Revenue sharewith a contribution of almost70%
3January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 3
Rallis India
Agrichemicals
Preferred distribution partner with MNCs
RAIL has one of the best distribution networks in the country with approximately 40,000retailers covering around 80% of India's districts. RAIL derives around 65% of its Revenues fromits domestic business through sale of own branded formulations (55%) and supply of bulk (10%)to other branded sellers.We believe that RAIL's distribution network is its key strength and thedifferentiating feature vis-a-vis competition. Hence, many MNC global players have inkedstrategic alliances with RAIL for distribution of their products (pesticides and seeds) in thedomestic market. strategic alliance contributes 1/3rd of domestic formulation.
Source: Company, Angel Research
Exhibit 3: Strategic AlliancesCompany Product CropE I Dupont Indoxacarb Cotton & GramSyngenta India Pretilachlor Rice
Thiomethozam Cotton & RiceEmmamaectine Benzoate Cotton
Makhteshim Chemical Works Atrazine SugarcaneCaptan General Fungicide
Bayer India Thirodicarb Cotton & VegetableNihon Nohayaku Fuji one RiceFMC India Carbofuran Rice
Carbosulfan Fruits & BrinjalBifenthrin Cotton & others
Gharda Chemicals Sulfosulfuron WheatChloro + Cyper Cotton & Rice
Yara International Calcium nitrate solution Water soluable fertilizersfor various crop
Borax International Boron 20% Cotton, Chillies & Tomato
Business restructuring aids turnaround
During FY2001-04, the company was involved in too many businesses which dilutedmanagement's focus and was in the red. Since then, it has come a long way. RAIL initiatedseveral measures to restructure its business following which it managed to turn the corner.Some of the measures initiated by the company included the following:
Selling of non-core business like Pharma and Gelatin;
Merger of subsidiaries to reduce operating expenses;
Disposing land to generate cash; and
Issuance of Preference share worth Rs88cr to Tata group companies.
We believe that RAIL'sdistribution network is its keystrength and thedifferentiating feature vis-a-viscompetition
4January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 4
Rallis India
Agrichemicals
Source: Company, Angel Research
Exhibit 4: Changing business mix...
Pesticides Nutrients Seeds Chemicals
97%
1%1%
1%
FY2009
85%
3%
1%
7%3%
1%
FY2004
Pesticides Fertilizer Seeds
Gelatine Chemical Other
Such restructuring resulted in the company's Profitability improving. EBITDA Margins also movedfrom being negative (-6%) in FY2003 to reach an all-time high of 13% in FY2009.
Source: Company, Angel Research
Exhibit 5: ...Improving Financials
(10.0)
(5.0)
0.0
5.0
10.0
15.0
(400)
(200)
0
200
400
600
800
1,000
1,200
FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009
Sales EBITDA %
RestructuringSale of pharma, fertiliserbusiness leading to dropin sales.Sale of asset andissuance of preferenceshare for rationalisationof debt.
Focus on corefocus on internal costcutting,introduction ofnew products andbrand building
Resultcontinuing benefit ofinternal cost cutting andfocuson export
DownfallDraught andovercapacity inindustry lead to losses
Rs
cr
%
EBITDA Margins touched anall-time high in FY2009
5January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 5
Rallis India
Agrichemicals
Investment Argument
Set to seize rising opportunities in the Domestic Pesticides market
India's pesticide consumption stands at an abysmal 0.48kg per hectare (ha) compared to11kg/ha for Japan and 4.5kg/ha for USA. We believe RAIL is well placed to seize the opportunityon account of having a well-spread distribution network, strong brands and robust new productpipeline. Moreover, according to industry estimates, counterfeit, fake and unorganised marketaccounts for another 50% of the industry. Nonetheless, we believe that RAIL has immenseopportunity to wrest marketshare as well as charge a premium for its products on account of itsstrong reach and goodwill among the farmers and the Tata brand.
Strong New Product Pipeline
New product launches has been a key strategy behind RAIL's turnaround performance. On anaverage, the company has been registering 5-6 products and launching 3-4 products every year.Pertinently, new product launches were possible due to RAIL's strong reach and goodwill amongthe farmers and the Tata brand associated with it which has enabled it to conduct the field trials.The Indian registration process is regarded as one of the most stringent ones in Asia (excludingJapan). Each new formulation typically takes 2-3 years for approval from the time of registration,as it has to undergo extensive field trials with respect to chemistry, toxicology, metabolism,efficacy, soil residue and packaging/labelling.
The company’s New product sales contribution has been in the range of 24-31% of its TotalSales over FY2001 to FY2009. Currently, the company's Top-5 products contribute almost25-30% of Sales. Of this, two brands are less than four years old while the balance three havebeen in the market for over four years. This indicates RAIL's strong capability to innovate andmarket new products. We believe RAIL's constant focus on new products would continue toyield results going ahead on the back of its strong R&D and registration pipeline. We believeRAIL's constant focus on new products would continue to yield results going ahead on the backof its strong R&D and Registration pipeline.
India's pesticide consumptionstands at an abysmal 0.48kgper hectare (ha) compared toglobal average
New product launches werepossible due to RAIL's strongreach and goodwill among thefarmers and the Tata brandassociated with it
Source: Company, Angel Research
Strong Brand & network
Advantage in field trialfor new product
Better product
Better sales
0
1
2
3
4
5
6
7
8
FY
2003
FY
2004
FY
2005
FY
2006
FY
2007
FY
2008
FY
2009
Product Registration Product Launch
Exhibit 6: New Product Registrations and Launches
6January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 6
Rallis India
Agrichemicals
Source: Company, Angel Research
Exhibit 7: New Products - Sales contribution
R&D - Eight new molecules in pipeline
RAIL has a robust pipeline of eight new molecules under the Fungicide category. Rallis and theCouncil of Scientific and Industrial Research (CSIR), New Delhi jointly hold commercial rights ofthese molecules, as this project is initiated under the Public-Private-Partnership (PPP) schemeof New Millennium India Technology Leadership Initiative. The government through soft loans(3% interest rate) funds this research. These molecules are at various stages of field trials.Agrichemical R&D is very similar to that of pharmaceutical, any molecule can turnout to be amulti-billion dollar opportunity or prove to be a complete failure. Given RAIL's strong R&D trackrecord, management expects to launch at least one successful molecule from its pipeline overthe next 2-3 years. Success of a single molecule, we believe, will put the company into analtogether new growth trajectory. However, we have not factored in the same, which poses anupside risk to our estimates.
Exports to register steady growth
The company undertakes Exports in the segments of Contract Manufacturing (13%),Formulation Sales (10%) and Bulk (12%).
Given RAIL's strong R&D trackrecord, we expect it to launchat least one successfulmolecule from its pipelineover the next 2-3 years
Source: Company, Angel Research; Note - AI - Active Ingredients, Contract Manufacturing
Exhibit 8: Revenue mix
0
25
50
75
100
FY2004
FY2005
FY
2006
FY2007
FY2008
FY2009
Revenue mix (%)
Domestic Export
Domestic -
Branded
55%
Export-CM
13%
Export-
bulk 12%
Export-
Branded
10%
Domestic -
AI 10%
Sales Break up
7January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 7
Rallis India
Agrichemicals
Over FY2004-09, RAIL's Exports registered a decent CAGR of 27.7%. However, FY2009 was anexceptional year where the company's exports spiked a significant 80% to Rs295cr andcontribution to Total Revenue stood at around 35% compared to 21% and 22% in FY2007 andFY2008, respectively. Thus, excluding the phenomenal growth registered in FY2009, thecompany's Exports CAGR during FY2004-08 stood at 10.3%.
The company's exceptional FY2009 performance was driven by a combination of factorsincluding:
Closing down of capacity in China before the Olympics 2008Closing of many manufacturing units on ecological ground created overall shortage.
Diversification of manufacturing base globallyMany global MNCs were dependent on Chinese manufacturing base for supply of their
product. To mitigate risks arising from such dependence, they started sourcing from the Indianmanufacturers.
Post the Olympics, the scenario has changed with many closed capacities coming on stream.Besides, overall slowdown in the global economy has also resulted in sluggish demand theworldover. It is against this backdrop that we estimate RAIL to post a decent CAGR of 17.7% inExports over FY2009-11E.
Contract Manufacturing - Cumulative Revenue target of Rs1,000cr over nextfive years
Currently, RAIL is an exclusive contract manufacturer and supplier of two agrichemicals andone speciality polymer to a global player. RAIL has entered into long-term (5-7 years) supplyagreement with global MNCs. Revenue and Profit visibility is usually high in such dedicatedmanufacturing supply agreements. Hence, going ahead, we expect this Segment to be the keygrowth driver for the company.
Global supplier for AI
Global agrichemical companies have been reducing manufacturing capacity of low valueproducts to concentrate on higher-value products. Conversely, they are maintaining their stronghold on off-patent AI through outsourcing the same. For example, Germany's BASF has cut itsrange of AI from 300 in 2001 to 130 in 2006. Syngenta has also reduced its portfolio from 120 to80. Bayer CropScience reduced its portfolio by 29 actives between 2000 and 2006. Total globalsales of agrichemicals were estimated to be worth US $41bn in CY2008. Sales of patentedproduct constituted approximately 1/3rd of the total and another 1/3rd is proprietary off patent(Patent of molecule has expired but no credible generic brand has been able to garner significantmarketshare from patented brand). Opportunity of even 10% of the total market size wouldtranslate into US $4bn. Hence, RAIL plans to selectively target this opportunity by supplying AIto the industry top players. Overall, RAIL is targeting cumulative Revenues of Rs1,000cr overthe next five years from this Segment alone.
FY2009 was an exceptionalyear with the company'sexports spiking a significant80% to Rs295cr
Revenue and Profit visibility ishigh in the manufacturingsupply agreements with theMNCs
Rising trend of outsourcingby global MNCs
8January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 8
Rallis India
Agrichemicals
Targeting niche high-Margin Agrichemicals
Agrichemicals being crop specific have varying demand based on the specific type of pest thathampers growth of the crop. Hence, one crop might need different type of insecticides or fungicideor herbicide in different regions. In addition, there are many crops that are grown in very specificregions and may require less amount of agrichemicals which may not be economical to produceand profitable to sell to the big global players. Therefore, the smaller regional players very oftendominate these niche segments. RAIL plans to meet the requirements of such niche demand,as it commands higher Margin.
Setting up new plant for CM
RAIL is setting up a new plant at Dahej for manufacturing AI for the export market as well as tomeet its own formulation consumption. Total capex of the Dahej plant is estimated at Rs150cr.The company has already incurred Rs40cr in FY2009. The plant is likely to be up and ready byJune 2010. The plant will enjoy SEZ status and avail tax exemptions. We expect this plant tocontribute Rs450cr to the company's Total Sales at peak capacity utilisation.
Formulation Exports - Still at investment stage
The company sells formulations under its own brand name post registration in the respectivecountries. Currently, the company sells its formulations in almost 25 different countries acrossthe world in regions like Latin American, USA, Japan, South East Asia, Australia and Africa.Registration and distribution network are the key requirements for this business. In line withthis, the company has tied up with local distributors for the supply of its product. However, webelieve that this business is still at the investment stage as the company is building its productportfolio through registrations, branding and network tie-ups. Nonetheless, we believe that exportformulation will be the next growth driver for the company post CM. We expect sustainablecontribution from this business to start trickling over the next 2-3 years. We believe that RAILmight acquire a company with a strong distribution network to meet its targets in the Segment.However, this seems sometime away as it is still in the process of building its product portfolio.
Hidden Gems
Advinus Therapeutics
During 2005, the company transferred its Knowledge Services Business, a Research &Development Centre at Bangalore to Advinus Therapeutics Pvt Ltd for a consideration of Rs26cr.Advinus is India's finest Clinical Research Organisation (CRO) involved in business of New DrugDiscovery (Pharma & Agriculture) and clinical trials. The company is the first of its kind in Indiato offer end-to-end development services to the global Pharma, Agro and Biotech industries.Advinus was named as India's best emerging CRO in drug discovery services, according to asurvey conducted by Proximare, a management consulting firm based in New Jersey thatexclusively serves pharmaceutical and biotechnology companies with strategic issues. Webelieve Advinus has one of the best management teams in place to capitalise on the R&Doutsourcing opportunity.
The Dahej plant is expected tobe operational by June 2010
The company is building itsproduct portfolio forinternational markets
Advinus is India's finest CROin the business of New DrugDiscovery (Pharma &Agriculture) and clinical trials
9January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 9
Rallis India
Agrichemicals
Source: Company
Exhibit 9: Advinus - Illustrious ManagementExecutive CommitteeDr. Rashmi Barbhaiya - CEO and Managing Ex-President of R&D - Ranbaxy ResearchDirector Laboratories
Ex-Vice President in the PharmaceuticalResearch Institute, Bristol-Meyers Squibb (BMS).
Dr. Kasim Mookhtiar - CSO and Senior Vice Ex-Bristol-Meyers Squibb & Ranbaxy Lab.President, Drug DiscoveryDr. Nimish Vachharajani - Vice President and Ex-Bristol-Meyers SquibbHead - Pharmaceuticals and AgrochemicalDevelopmentScientific Advisory BoardChristopher M. Cimarusti, Ph.D Ex-Bristol-Meyers Squibb (BMS) - worked in drug
discovery and development.Perry B. Molinoff, MD Professor of Pharmacology at the University of
Pennsylvania. More than 30 years of experiencein academic and industrial sectors
David C. U'Prichard, Ph.D President of Druid Consulting LLC, consultantto the pharmaceutical and biotechnologyindustries
The Tata group is a major shareholder in Advinus while RAIL holds 15% stake in it while thecompany management holds minority stake. As per media reports, Advinus Revenues are in theregion of Rs80-100cr, while total investment are estimated at around Rs200cr. Advinus iscurrently loss making and under investment mode. RAIL does not plan to sell its stake as itconsiders it as a strategic investment. We have not taken any value of Advinus in our valuationof Rallis however any developments on this front would have ripple effects on Rallis.
Real Estate
RAIL has considerable amount of surplus real estate that it can divest if the need arises. Thecompany in the past had sold real estate to raise funds for its core business. As per mediareports, the company currently has excess land of 85 acres in Hyderabad and 22 acres inThane, Maharashtra. We have conservatively estimated value of the same in the region ofRs300-400cr translating into Rs250-334 per share. Our valuations are in line with the historicdeal done by RAIL wherein it had sold 31 acre property at Hyderabad for Rs90cr to Peninsula inFY2008. We have not factored any value of Real Estate in our valuation.
Miscellaneous
RAIL derives a small amount (3% of Total Revenues) of revenue through sale of seeds, plantnutrients and leather chemical. In case of its Seeds business, the company markets hybrid,high yielding and genetic modified seeds of different crops (Bt Cotton, Wheat, Paddy, etc). RAILalso has a small presence in the Leather Chemical business through its brand Vegtan for theTannery Industry. Vegtan holds 45% marketshare in the domestic market.
We have not taken any valueof Advinus in our valuation ofRallis; however, anydevelopments on this frontwould have ripple effects onRallis
We estimate value of thecompany’s surplus realestate at Rs300-400crtranslating into Rs250-334 pershare
10January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 10
Rallis India
Agrichemicals
Financial Performance
Revenues to post moderate yoy growth
Notably, in FY2009, RAIL logged one of its best performances in the current decade driven bystrong Exports that led to Total Sales growth of 24% to Rs837cr. Overall, RAIL logged 16.5%CAGR in Total Sales over FY2007-09, wherein Exports posted a CAGR of 36.8% over thementioned period. Going ahead, we expect the company's Total Revenues to post moderateCAGR of 14% over FY2009-11E on the back of 17.7% growth in Exports. We estimate RAIL’sExport to receive a major leg up once its new plant at Dahej comes on stream in June 2010.
Profitability to improve marginally
RAIL improved its Profitability substantially during FY2007-09. EBITDA posted a CAGR of 187.5%over FY2007-09 as EBITDA Margins improved from 2.2% in FY2007 to touch an all-time high of13.3% in FY2009 on the back of strong pricing power. We expect RAIL to further improve itsEBITDA Margins to 14% and 15.1% in FY2010E and FY2011E respectively, due to continuingbenefits of its restructuring exercise. We believe our EBITDA Margins are achievableconsidering that peer, Nagarjuna Agrichem, posted 19.2% EBITDA Margins in FY2009. Weestimate EBITDA to register a CAGR of 21.7% over FY2009-11E compared to Sales CAGR of14% over same period.
We expect the company'sTotal Revenues to postmoderate CAGR of 14% overFY2009-11E
We estimate the company'sNet Profit to post a CAGR of24.3% over FY2009-11E
Source: Company, Angel Research
Exhibit 11: EBITDA Margin Trend
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
FY2007 FY2008 FY2009 FY2010E FY2011E
(%)
EBITDA Margins to expanddue to continuing benefits ofrestructuring on strongpricing power
Source: Company, Angel Research
Exhibit 10: Financial Performance
0
5
10
15
20
25
30
0
200
400
600
800
1,000
1,200
FY2008 FY2009 FY2010E FY2011E
Net Sales % chg
(Rs
cr)
(%)
(60)
(40)
(20)
0
20
40
60
80
100
120
140
160
0
20
40
60
80
100
120
140
FY2008 FY2009 FY2010E FY2011E
PAT % chg
(Rs
cr)
(%)
11January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 11
Rallis India
Agrichemicals
RAIL's Net Profit registered sluggish CAGR of 12.4% over FY2007-09 primarily due to the risingTax outflow owing to reducing carry forward Losses. However, going ahead, we estimate thecompany's Net Profit to almost mirror EBITDA growth and post a CAGR of 24.3% overFY2009-11E.
Stabilising Debt:Equity ratio
Post restructuring, RAIL was able to trim down its Debt-to-Equity ratio from 6.1x in FY2003 to2x in FY2004. Thus, FY2004 onwards the company's debt levels have been on a declining trendtouching an all-time low of 0.2x in FY2008. Nonetheless, we estimate the Debt-to-Equity ratioto see a spike to 0.6x in FY2010. Key reasons for increase in the Debt-to-Equity include:
1) Redemption of Preference shares to the tune of Rs88cr; and
2) Capex of Rs150cr being incurred for the new manufacturing unit at Dahej
Source: Company, Angel Research
Exhibit 12: Debt:Equity Ratio
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY
20
03
FY
20
04
FY
20
05
FY
20
06
FY
20
07
FY
20
08
FY
20
09
FY
20
10
E
FY
20
11E
(x)
We expect the Dahej plant to be part-funded by Debt and sale of investments. In the absence ofsale of investments and the company resorting to debt for funding, its Debt-to-Equity ratio wouldstand at 0.8x in FY2010E. However, we expect Debt-to-Equity to stabilise post investment inDahej.
We estimate the company'sNet Profit to almost mirrorEBITDA growth and post aCAGR of 24.3% overFY2009-11E
12January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 12
Rallis India
Agrichemicals
Return Ratios set to improve
The company’s RoE soared to 45.2% in FY2008 on the back of exceptionally high OtherIncome arising from sale of assets. In FY2009, the company recorded RoE of 19.6% on theback of expansion in EBITDA Margins. Going ahead, we estimate the company to furtherimprove its RoE to 21.9% and 26.7% in FY2010 and FY2011E respectively, following animprovement in EBITDA Margins due to continuing benefits of restructuring.
Downside risks to our call
Growth challenge in Exports: If the company is unable to meet our export target due to anyunforeseen external factors, the company may post dismal performance and pose a downsiderisk to our estimates.
Vagaries of Monsoon: Agrichemicals are the last input in any agricultural operation andprotect the final output ie. crop. In case of India, most of the agricultural production is rain fedand hence highly dependent on monsoon. Hence, vagaries in season could affect the demandfor agrichemicals and in turn impact our estimates.
Source: Company, Angel Research; Note: Adjusted for exceptional item.
Exhibit 14: DuPont AnalysisFY2008 FY2009 FY2010E FY2011E
EBITDA/Sales (%) 8.8 13.3 14.0 15.1
Sales/Total Assets (x) 1.9 1.9 1.8 2.0
PBT/EBITDA(x) 2.3 0.9 0.9 0.9
PAT/PBT (x) 0.8 0.6 0.7 0.7
Total Assets/Net Worth (x) 1.6 1.7 1.6 1.3
RoE (%) 16.6 19.6 21.9 26.7
0
5
10
15
20
25
30
FY2008 FY2009 FY2010E FY2011E
(%)
RoE (%) RoCE (%)
Exhibit 13: Improving Return Ratios
Source: Company, Angel Research; Note: Adjusted for exceptional item.
13January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 13
Rallis India
Agrichemicals
Source: Company, Angel Research
Exhibit 15: One-year Forward P/E Chart
0
100
200
300
400
500
600
700
Apr-
03
Jul-
03
Oct
-03
Jan
-04
Apr-
04
Jul-
04
Oct
-04
Jan
-05
Apr-
05
Jul-
05
Oct
-05
Jan
-06
Apr-
06
Jul-
06
Oct
-06
Jan
-07
Apr-
07
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07
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-07
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-08
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08
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-08
Jan
-09
Apr-
09
3x
5x
7x
9x
11x
(Rs)
Outlook and Valuation
The Agriculture Sector has seen rejuvenation of government interest since the past couple ofyears. Food security is also top priority for the government while reduction in food loss is one ofthe easiest ways to boost food production. Usage of Pesticides or agrichemicals can reducethe loss of food production. However, consumption of agrichemicals has been restricted to therich farmers. Hence, to increase and eliminate the disparity in agrichem consumption, thegovernment has been making concerted efforts to make the farmers aware of the benefits (higherincome) of using agrichemicals apart from enhancing allocation to schemes like RashtriyaKrishi Vikas Yojana.
We believe that RAIL is well placed to capitalise on these emerging opportunities. Besides, thecompany had also undertaken a restructuring exercise post FY2004, which resulted in it clockingall-time high EBITDA Margins in FY2009. Going ahead, we expect Contract Manufacturing todrive the company's next level of growth particularly with its new plant coming on stream byJune 2010. We also expect the company to register steady CAGR of 17.7% in Exports overFY2009-11E. Overall, we estimate RAIL to register a CAGR of 14% and 24.3% in Net Sales andProfit over FY2009-11E, respectively.
On the valuation front, at Rs735, the stock is trading at 8.9x FY2011E Earnings and 5.4xFY2011E EV/EBITDA. Historically, RAIL has traded in the 3-11x one-year forward PE band, andat an average 8x over the last couple of years. Going ahead, on account of improving ReturnRatios and higher Net Profit growth, we expect the stock to trade at higher valuations than itshistorical average. We Initiate Coverage on the stock with an Accumulate rating andTarget Price of Rs796.
14January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 14
Rallis India
Agrichemicals
Annexure
Industry Overview
Agrichemicals also known as Pesticides are substance or mixture of substances that are usedto avert, destroy or control any kind of pests or unwanted type of plants or animals that causeharm to crops or hampers the normal growth process of a crop. As per a Government of Indiaestimate of 2002, value of crop losses caused due to non-usage of pesticides was aroundRs90,000cr. Thereon, assuming losses grew at an average 2%, total losses would have amountedto Rs101,355cr in FY2009, a staggering 2.2% of India's GDP. Pesticides are the last input inany agricultural operation, which protects all the other inputs as significant investment arealready committed by then.
Size
Global Agrichemical industry has grown at an average 7.1% over CY2001-08 to US $41.7bn.For CY2008, the industry registered outstanding growth of 25% yoy on the back of volumegrowth and increase in price. On the other hand, the Indian Agrichemical Industry wasestimated at around US $1bn (Rs5,000cr) at the end of FY2009. In FY2009, overall industrywitnessed marginal volume decline, but saw a price increase of 10-12%.
Land
Seed
Labour
Fertilisers
Agrichemicals
Exhibit 16: Investment chain of farmer
Source: Industry , Angel research
Pesticides are the last input inany agricultural operation,which protects all the otherinputs as significantinvestment are alreadycommitted by then
Year US $mn % yoy2001 25,7602002 25,150 (2.4)2003 26,710 6.22004 30,725 15.02005 31,190 1.52006 30,425 (2.5)2007 33,390 9.72008 41,735 25.0
Source: Company
Exhibit 17: Global Agrichemical market
15January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 15
Rallis India
Agrichemicals
India's consumption of agrichemical is one of the lowest in the world, standing at 0.48kg perhectare. This compares very poorly with other countries that have less arable land undercoverage. For instance, countries like Taiwan, Japan, Holland and Korea have higher consumptionthan India. We believe this again highlights the under usage of agrichemicals by Indian farmersand unexploited opportunity at bay for the agrichemical companies. India produces approximately16% of the world's total food grain production and uses only around 2% of pesticides. Lowconsumption can be attributed to: a) fragmented land holdings, b) low level of irrigation, c) highdependence on monsoons and d) low awareness among farmers about the benefits of usingpesticides.
In India, Andhra Pradesh (AP) is the single largest consumer of pesticides, with a total share ofaround 22%. Including AP, eight states consume 83% of total agrochemical sold in India. If onecompares the consumption pattern of CY2006 with CY2001, contribution from other states hasdeclined from 19% to 17%, meaning usages has increased in existing states while other statesremain unexploited.
India's consumption ofagrichemical is one of thelowest in the world at0.48kg/ha
Key Markets and Consumption
North America, with a share of 26% in total consumption, is the largest consumer of agrichemicalsglobally. The Asia-Pacific and EU regions consume almost the same amount of agrichemicals.
Source: Industry
Exhibit 18: Global Agrichem sales by region Global Pesticides consumption (Kg/ha)
N-America A-Pac EU Latin America Others
26%
24%
26%
17%
7%
0
2
4
6
8
10
12
14
16
18
Taiwan Japan Holland S.Korea France USA India
Source: Industry
Exhibit 19: State-wise Share of Pesticides Consumption
0%
5%
10%
15%
20%
25%
30%
AP
Pu
nja
b
Ma
ha
rast
ra
Ka
rna
taka
Ha
raya
na
Gu
jara
t
W.B
en
ga
l
Tam
ilN
ad
u
Oth
ers
2001 2006
16January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 16
Rallis India
Agrichemicals
Source: Industry
Exhibit 21: India’s Changing Pesticides Consumption Pattern
Fungicides Herbicides Insecticides
15%
18%
67%
FY2007
Pesticides Classification and Marketshare
Agrichemicals are classified as Insecticides, Herbicides and Fungicides. In case of India'sAgrichemical market, insecticides constitute the largest share at 67% compared to the globalconsumption of 33%. Globally, herbicides constitute the largest consuming agrichemical with ashare of 45%. We believe dichotomy in higher consumption of insecticides in India is due tolower labour cost that replaces use of herbicides and due to the tropical climate.
Source: Industry
Exhibit 20: India v/s Global Share of Pesticides Consumption - 2007
India's changing Pesticides consumption pattern
India has predominately been an insecticides market due to its tropical climate and availabilityof cheap labour (replacement for herbicides). However, over a period of time, there has been aminor, but certain shift in demand towards fungicides and herbicides.
Fungicides Herbicides Insecticides
15%
18%
67%
India
Fungicides Herbicides Insecticides
22%
45%
33%
Global
We believe dichotomy inhigher consumption ofinsecticides in India is due tolower labour cost thatreplaces use of herbicides anddue to the tropical climate
Over a period of time, therehas been a minor, but certainshift in demand towards fun-gicides and herbicides
12%
16%72%
FY2002
Fungicides Herbicides Insecticides
17January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 17
Rallis India
Agrichemicals
Key consuming crops
Rice is the largest consumer of total pesticides followed by Cotton. Cotton used to be thelargest consumer, but introduction of Bt Cotton in the Indian market had reduced dependenceon agrichemicals for crop protection. However, in recent times, a new pest has been plaguingthe Bt Cotton crop, which has in turn benefited the Agrichemical industry.
Competition and Players
Globally, six major innovators control 75% of the total market, while 4-5 generic players control10% and the balance 15% is controlled by hundreds of small regional players.
Company Sales (US$bn)MAI 2.3
Nufarm 2.2
Sumitomo 2.2
FMC 1.0UPL 1.0
Exhibit 23: Global Innovator and Generic playersCompany Sales (US$bn)Bayer 9.3Syngenta 9.1DuPont 7.9BASF 4.9Dow 4.5Monsanto 4.0
Source: Industry, Angel Research
Source: Industry
Exhibit 22: Consumption (%) of Pesticide on different Crops in India (2006)
0% 4% 8% 12% 16% 20% 24% 28%
Rice
Cotton
Wheat
Chillies
Soyabean
Grapes
Sugarcane
Potato
Red Gram
Tea
Bengal Gram
Mango
Other fruits
Other vegetables
Others
Key opportunities and challenges for industry
Low penetration of pesticides - Estimated size of the Indian economy is US $1trn of whichAgriculture accounts for 18%. The Agrichemical industry's size is estimated at US $1bn(Rs5,000cr) i.e. 0.1% of the country's total GDP and 0.6% of Agriculture GDP. Meanwhile, thesubsidy burden of urea for FY2009 is estimated at US $21.2bn or 2% of the total GDP and 12%of agriculture GDP. We believe this demonstrate the gross under penetration of agrichemicaland the opportunity that is available to the companies in the Sector.
18January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 18
Rallis India
Agrichemicals
Exhibit 24: Products coming off patent (2009-14E)
Source: Industry, Angel Research
Category Sales (2007 US $mn)Herbicides 800Insecticides 1,350Fungicides 1,448Other 50Total 3,648
Off patent proprietary: Global Agrichemical companies have been reducing manufacturingcapacity of low-value off patent proprietary products (ie. patent of molecule has expired, but nocredible generic brand has been able to garner significant marketshare from the patented brand).BASF has cut its range of AI from 300 in 2001 to 130 in 2006. Syngenta has reduced its portfoliofrom 120 to 80. Bayer CropScience reduced its portfolio by 29 actives between 2000 and 2006.Most of these off patent products are outsourced to third party manufacturer. Approximately,1/3rd of the total agrichemical sales are estimated to be that of proprietary off patent.
Diversification of manufacturing base: China has come to be known as factory of the worldand this fact remains the same for agrichemicals. However, to diversify risks arising out of singlelocation manufacturing base, many MNCs have been looking at other countries. Here, theIndian agrichemical manufacturers can position themselves as suitable alternatives to theirChinese counterparts.
Biotech seeds threat to agrichemicals: Scientific research has come up with seeds thathave self-immunity towards natural adversaries. This can be a potential threat to the business ofagrichemicals. Best example of such an introduction in the Indian market is "Bt Cotton", whichresulted in a decline in the consumption of agrichemicals by cotton crop. However, off late therehave been few reports of Bt Cotton unable to develop immunity towards new type of pests.
Patent expiry of molecules: Agrichemicals are protected by patents to encourage innovationakin to the Pharmaceutical industry. Going ahead, many molecules are likely to go off patentthrowing the market open for generic players. As per estimates, total likely available opportunitythrough patent expiry stands at US $3.6bn.
19January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 19
Rallis India
Agrichemicals
Profit & Loss Statement (Consolidated) Rs croreY/E March FY2008 FY2009 FY2010E FY2011E
Net Sales 674.6 836.7 946.9 1,087.3
% chg 9.4 24.0 13.2 14.8
Total Expenditure 615.5 725.8 814.4 923.1
EBIDTA 59.1 110.9 132.6 164.2
(% of Net Sales) 8.8 13.3 14.0 15.1
Other Income 111.7 22.7 24.4 26.3
Depreciation& Amortisation 20.1 22.9 24.4 26.8
Interest 12.1 11.2 19.0 13.0
PBT 138.7 99.5 113.6 150.7
(% of Net Sales) 20.6 11.9 12.0 13.9
Tax 21.1 35.2 39.4 51.4
(% of PBT) 15.2 35.4 34.7 34.1
PAT 117.6 64.3 74.2 99.4
% chg 131.2 (45.3) 15.4 33.9
Exceptional item (Adj. for Tax) 74.0 0.0 0.0 0.0
Adj PAT( After Excp. item ) 43.6 64.3 74.2 99.4
Y/E March FY2008 FY2009 FY2010E FY2011E
SOURCES OF FUNDSEquity Share Capital 12.0 12.0 12.0 12.0Preference capital 88.0 88.0 0.0 0.0Reserves & Surplus 207.8 249.8 316.9 402.3Shareholders fund 307.8 349.7 328.9 414.3Total Loans 46.6 82.5 199.7 124.2Defered Tax Liability 0.0 0.0 0.0 0.0Minority Interest 0.0 0.0 0.0 0.0Total Liabilities 354.4 432.2 528.6 538.5APPLICATIONGross Block 296.0 337.7 339.3 484.3Less: Acc.Depreciation 161.4 179.1 203.4 230.2Net Block 134.6 158.6 135.8 254.1Capital Work-in-Progress 13.2 29.1 137.5 17.5Investments 55.5 136.2 98.5 98.5Current Assets 338.1 351.9 411.0 472.0Current liabilities 201.1 260.8 267.6 305.7Net Current Assets 137.1 91.1 143.4 166.3Misc exp 14.0 17.3 13.4 2.1Total Assets 354.4 432.2 528.6 538.5
Balance Sheet (Consolidated) Rs crore
Cash Flow Statement (Consolidated) Rs croreY/E March FY2008 FY2009 FY2010E FY2011E
Profit before tax 146.4 107.2 113.6 150.7
Depreciation & others (61.8) 32.9 43.4 39.7
Change in Working Capital (103.6) 40.3 (35.0) (23.0)
Direct taxes paid (25.9) (31.0) (34.6) (45.2)
Cashflow from operation (44.9) 139.1 87.3 122.2
(Inc)./ Dec. in Fixed Assets 63.3 (64.4) (110.0) (25.0)
Free Cash Flow 18.3 74.7 (22.7) 97.2
Inc./ (Dec.) in Investments (20.9) (77.9) (37.6) 0.0
Issue of Equity 0.0 0.0 (88.0) 0.0
Inc./(Dec.) in loans 10.7 36.6 117.2 (75.5)
Dividend Paid (Incl. Tax) (18.9) (30.2) (22.4) (7.0)
Others (4.3) (3.4) (19.0) (13.0)
Cash Flow from Financing(33.5) (74.8) (49.8) (95.5)
Inc./(Dec.) in Cash (15.1) (0.2) 2.7 1.7
Opening Cash balances 22.2 7.0 8.2 10.9
Closing Cash balances 8.4 8.2 10.9 12.6
Key Ratios
Y/E March FY2008 FY2009 FY2010E FY2011E
Per Share Data (Rs)EPS 36.4 53.6 61.9 82.9
Cash EPS 114.9 72.8 82.2 105.2
DPS 16.0 16.0 5.0 10.0
Book Value 183.4 218.4 274.5 345.7
Operating Ratio (%)Inventory (days) 79.9 65.1 70.0 70.0
Debtors (days) 55.1 50.6 51.0 51.0
Debt / Equity (x) 0.2 0.3 0.6 0.3
Returns (%)RoE* 16.6 19.6 21.9 26.7
RoCE 13.0 22.4 22.5 25.8
Dividend Payout 19.1 34.9 9.4 14.1
Valuation Ratio (x)P/E 20.2 13.7 11.9 8.9
P/E (Cash EPS) 6.4 10.1 8.9 7.0
P/BV 4.0 3.4 2.7 2.1
EV / Sales 1.3 1.0 1.0 0.8
EV / EBITDA 14.6 7.4 7.3 5.4
Note: * Adjusted for exceptional item.
20January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 20
Rallis India
Agrichemicals
DisclaimerThis document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possessionthis document may come are required to observe these restrictions.Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory,compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change withoutnotice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and are for general guidance only. While everyeffort is made to ensure the accuracy and completeness of information contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can usethe information as the basis for any claim, demand or cause of action.Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document should make such investigations as it deems necessary to arriveat an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determinethe merits and risks of such an investment. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions- futures, options and other derivatives as well as non-investment grade securities - involve substantial risks and are not suitable for all investors. Reports based on technical analysis centers on studyingcharts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update the information herein on a reasonable basis, Angel Broking, its subsidiariesand associated companies, their directors and employees are under no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may prevent AngelBroking and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Angel BrokingLimited and affiliates, including the analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companiesmentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions.Angel Broking Limited and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companiesreferred to in this report, as on the date of this report or in the past.
Buy (Upside > 15%) Accumulate (Upside upto 15%) Neutral (5 to -5%)Reduce (Downside upto 15%) Sell (Downside > 15%)
Ratings (Returns) :
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21January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 21
Rallis India
Agrichemicals
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Porbandar (Kuber Life Style) - Mob.-98242 53737
Pune - Tel : (020) 3093 4400 / 3052 3217
Jamnagar (Moti Khawdi) - Tel: (0288) 2846 026
Jamnagar(Madhav Plaza) - Tel: (0288) 2665 708
Jalgaon - Tel: (0257) 2234 832
Pune (Aundh) - Tel: (020) 4104 1900
Mangalore - Tel: (0824) 3982 140
Kolhapur - Tel: (0231) 6632 000
Madurai Tel: (0452) 3941 394
Ahmedabad (C. G. Road) - Tel: (079) 3982 9934 Powai - Tel: (022) 3952 6500Rajkot (Race course) - Tel: (0281) 2490 847Surat - Tel: (0261) 3071 600
Ahmedabad - Tel: (079) 3941 3940
Bengaluru - Tel: (080) 3941 3940
Chennai - Tel: (044) 3941 3940
Hyderabad - Tel: (040) 3941 3940
Coimbatore - Tel: (0422) 3941 394
Cochin - Tel: (0484) 3941 394
Indore - Tel: (0731) 3941 394
Jaipur - Tel: (0141) 3941 394
Kanpur - Tel: (0512) 3941 394
Kolkata - Tel: (033) 3941 3940
Lucknow - Tel: (0522) 3941 394
Ludhiana - Tel: (0161) 3941 394
Mumbai (Powai) - Tel: (022)3952 6500
Pune - Tel: (020) 3941 3940
New Delhi - Tel: (011) 3941 3940
Nagpur - Tel: (0712) 3941 394
Nashik - Tel: (0253) 3941 394
Mumbai (Goregoan) Tel: (022) 2879 0411-15
Surat - Tel: (0261) 3941 394
Rajkot - Tel :(0281) 3941 394
Visakhapatnam - Tel :(0891) 3941 394
Corporate & Marketing Office : 612, Acme Plaza, M.V. Road, Opp Sangam Cinema, Andheri (E), Mumbai - 400 059 Tel : (022) 3952 7100 / 4000 3600NRI Helpdesk : e-mail : [email protected] Tel : (022) 4000 3622 / 4026 2700Investment Advisory Helpdesk : e-mail : [email protected] Tel : (022) 3958 4000Commodities : e-mail : [email protected] Tel : (022) 3081 7400PMS : e-mail : [email protected] Tel: (022) 3953 2800Feedback : e-mail : [email protected] Tel : (022) 2835 5000