>Rallis India (IDFC SSKI)

We recently met Rallis India’s (Rallis) management to get its perspective on the global and domestic agrochemical industry and the company’s growth outlook. Rallis continues to be fairly upbeat on the outlook for global crop protection industry in general and India in particular. Given the consistently increasing MSPs (minimum support prices) across crops, an improving irrigation scenario as well as flat prices of key inputs like fertilizers, Indian farmers are intensifying the usage of crop protection products. Rallis expects the Indian crop protection industry to grow at 12-15% (in volume terms) – at least for the next 4-5 years and the company is well placed to grow faster than the market. In our view, with its strong India-franchise along with steadily growing exports and CRAMS business, Rallis is an interesting crop protection play. Rallis has been aggressively filing registrations in non-US/ EU geographies, which will enable it to register healthy export growth in the coming years. Rallis is also positive on growth prospects of its CRAMS business as the company seeks to leverage its relationships with multiple global players. Rallis is working on optimizing its cost structure, which can lead to accelerated profit growth in the coming years. Over the last 3-4 years, Rallis has achieved significant operational
efficiency improvements under the new management and the company sees significant room for eking out more gains. Rallis trades at ~4x FY09E EV/ EBITDA and healthy outlook for operating profit growth.

Global agrochemicals – demand outlook intact
Rallis management remains positive on the outlook for the global crop protection industry. The management has affirmed that while 2008 has been an exceptional year in terms of both value and volume growth (and unlikely to be repeated), the outlook for 2009 continues to be positive.
Prices of agricultural commodities, though significantly off from the peak levels, are still high vis-à-vis prices observed 2- 3 years ago. Also, the pressure on output prices has coincided with reduction in key cost heads like power and fertilizers for crop growers. As a consequence, farmers’ profitability remains healthy and there is continued incentive for them to cultivate (especially in developed economies). This indicates sustained volume growth momentum for the agrochemicals industry though some value erosion cannot be ruled out due to the high base effect.

Regulated markets – not easy for Indian players to enter
- > US market – a tough nut to crack: Rallis management believes that US is a tough market for new generic players. Given the highly consolidated distributor networks in regulated markets, it is difficult for newer generic companies to make a mark in the US market. As for launching new products in the geography, the initial registration process takes around two years for a product with costs estimated upwards of US$0.5m. The costs are significantly higher for relatively newer molecules. Growing regulatory scrutiny in the crop protection segment is also pushing up registration costs for new players. Identification of relevant products to penetrate the US market is a key strategic imperative for all new entrants in the geography.

- > EU – common processes make the task relatively easier: With most of the process requirements (in terms of new registrations) being common across countries in the EU, it becomes relatively easier for generic companies to expand in this market. Also, forging strong distributor partnerships in the EU is the way followed by most generic companies to achieve scale in the key geographies and products.

Domestic crop protection sector – upbeat outlook
With consistently rising MSPs in India over the past few years, the outlook for domestic agriculture remains upbeat. The Indian farmer particularly has been benefitting on two counts – increase in prices of agricultural commodities and lower fertilizer costs (due to regulated price mechanism). Consequently, the Indian farmer currently finds himself in a sweet spot (subject to a normal monsoon).

Pesticide usage in India well below global standards
In India, the use of agrochemicals has traditionally been a tertiary need for farmers. Use of seeds and fertilizers are the two primary priorities in India and Rallis estimates that cost of agrochemicals as a percentage of a farmer’s total costs is miniscule (2-3%) in India as against the internationally observed range of 6-8%. However, a distinct behavioral change has been observed over the last few years and Indian farmers are increasingly looking at the use of prophylactic doses for crops which will lead to higher usage of herbicides and fungicides.

To see full report: RALLIS INDIA