Analytical Contact:

Anuj Sethi
Director, CRISIL Ratings

Rajeswari Karthigeyan
Associate Director, CRISIL Ratings

Aparna Kirubakaran
Manager- CRISIL Ratings

Anubha Puthiyaveettil
Manager- CRISIL Ratings

2014 CRISIL Ltd. All rights reserved.

Indian Agrochemical Sector On a steady growth trajectory

August 22, 2014

1

Key Messages
Healthy demand prospects continue for agrochemicals

Domestic industry to grow at CAGR of 12-13% over the medium term. Export growth to
remain healthy

Indias share in global agrochemical market to increase to 13% in 2018-19 from 9% in

2013-14

Players across segments exhibit steady revenue growth and profitability

- Diversified revenue profile renders business less susceptible to monsoon failures

Despite working capital intensity, credit metrics remain healthy

Scale of operation and integration key rating differentiators

Key challenges

Large players product risk

Small players working capital management and import risk for formulators

2014 CRISIL Ltd. All rights reserved.

Credit quality has been fairly steady over the past 5 years

- Integrated and technical manufacturers - pollution norm compliance

Opportunities

Consolidation, business tie-up and related diversification

 2014 CRISIL Ltd. All rights reserved.

Indian agrochem sector gaining momentum

India increasing its share in global agrochemicals industry

Fifth largest producer of agrochemicals globally, poised to grow at a healthy pace
USD68 bn
USD54 bn
Global Market

5%

USD40 bn

FY 19P

5%

FY 08

12-13%
13%

Indian Market

USD2.2 bn

USD4.9 bn

USD8.8 bn

Source: CRISIL Ratings

Indias share in global crop protection market to increase to about 13% in FY19 from
about 9% in FY14E

2014 CRISIL Ltd. All rights reserved.

FY 14E

DRIVERS

Increasing demand for food grains and constrained arable land, compelling higher crop/land
yield

Increase in awareness among farmers, driven by corporate initiatives to increase pesticide

usage

Healthy export potential; exports to grow by 8-10%

4

Agrochem Industry India Vs Global

Indian Agrochemical Industry

Global Agrochemical Industry

More fragmented with 55-60% of market

catered to by 15-20 players

Less fragmented with 70-80% of the

market catered to by top 6 players

Higher consumption of insecticides

Accounts for 48% of consumption
Driven by tropical climate and cheaper
labour

Higher consumption of herbicides

Accounts for around 50% of
consumption

Low R&D spend: 1-2% of turnover

Higher R&D spend: 10-12% of turnover

2014 CRISIL Ltd. All rights reserved.

Differentiators

Commonality
Share of patented products 15-20%

Share of patented products 24%

Industry performance across verticals

2014 CRISIL Ltd. All rights reserved.

CRISIL rates about 78% of organized agrochemicals industry in

India
Large coverage, with ratings on most key players
CRISIL Coverage 44 companies rated

CRISIL Rated Players (by Revenue)

Formulator,
19%

Rated by
others, 12%

Intermediate,
2%

Integrated,
65%

CRISIL
Rated, 78%

Technicals,
12%

2014 CRISIL Ltd. All rights reserved.

Niche
segment, 2%

Unrated,
10%

Source:CRISIL Ratings

Healthy portfolio
- Median rating at CRISIL A
- 73% of ratings in investment grade (BBB- and above)

Distinct characteristics across value chain

Intermediate

Technical

Formulation

Integrated

Manufacturing
Process

Standardised
Handles toxic
inputs

Technical and
knowledge intensive
Handles toxic inputs
Limited product
flexibility

Higher product flexibility

Combination of
technical and
formulations

Entry Barriers

Low
Commodity-like
product
Highly
competitive
market

High
Closely held product
technology
Patents, registrations
Environmental
approvals

Small scale Low

Large scale - High
Patents , registration
Brand equity/loyalty
Wide distribution channel

High
Patent, registration,
brand equity, and
distribution
Environmental
approvals

Competitive
Strength

Process skills
Cost efficiency

Scalability, innovation
Product patents,
registrations

Product mix
Marketing reach
Brand strength

Scalability, product
mix and marketing
reach, integration

Profitability

Relatively low

Moderate to healthy

Moderate to healthy

Moderate to healthy

Working Capital
Intensity

Low

Moderate

High

High

Impact of Monsoon

Low

Trickle-down effect

Direct

Direct

Capital Intensity

High

High

Low

High

Key Features

2014 CRISIL Ltd. All rights reserved.

Value Chain

Players across segments exhibit steady revenue growth and

profitability
Revenue registered 13% CAGR

Revenues
US crop season delayed

Growth stable; susceptibility to monsoon more

pronounced for players with limited geographic
reach and product portfolio
Exporters partly insulated from domestic downturns

Exporters benefit from low cost manufacturing

Large players supported by economies of scale
and product strength.
Intermediate and small players constrained by
low value addition and price competition.

RoCE
Formulator
requirements

by

low

capital

Intermediate Constrained by low profitability

Operating Margin

21%

Supported

RoCE

2014 CRISIL Ltd. All rights reserved.

Profitability drivers : scale and product-mix

30%
25%

18%

20%

15%

15%
12%

10%

9%

5%

6%

0%
2008-09

2009-10

Overall
Large exporters

2010-11

2011-12

Large Players
Intermediate

2012-13

2013-14E

Small Players

2008-09

2009-10

Total
Integrated

2010-11

2011-12

Intermediate
Formulator

2012-13 2013-14E
Technicals

Source:CRISIL Ratings

Most players display high working capital intensity

Industry Working Capital Level
250

50

215

211

218

120

Debtor Days

100

150
100

216

76

85

91

95

98

100

81

83

88

88

86

89

80
60
40

0
2008-09

2009-10

Inventory days

2010-11

2011-12

Debtor days

2012-13

2008-09

2013-14E

2009-10

Intermediate

GCA days

2010-11
Technicals

High debtor days

2011-12

2012-13 2013-14E

Integrated

Formulator

Source:CRISIL Ratings

Long credit period extended to farmers

Sales occur at onset of season; collection occurs
post harvest

110

Inventory Days

100

2014 CRISIL Ltd. All rights reserved.

Days

200

183

194

Segment-wise Working Capital

90

Large inventory
Seasonal demand and dependence on monsoon
Large product mix
Sizeable imported raw materials
Intermediate lower working capital requirements
Credit period extended on case-to-case basis
Better order visibility

80
70
60
50
40
30
2008-09

2009-10

Intermediate

2010-11
Technicals

2011-12

2012-13 2013-14E

Integrated

Formulator

Source:CRISIL Ratings
10

Healthy capital structure despite working capital intensity

driven by moderate capex and steady accruals
Capex to Gross Block

1.20

0.36

1.00

0.30

0.80

0.24
Times

0.60

0.18

0.40

0.12

0.20

0.06

0.00

2008-09

2009-10

2010-11

2011-12

2012-13 2013-14E

2008-09

2009-10

2010-11

2011-12

2012-13 2013-14E

Source: CRISIL Ratings

Net worth registered CAGR of 15% from 2008-09 to

2012-13
Intermediate Relatively high gearing
100%
Low cash accruals and high use of bank funding for meeting
75%
working capital requirements
50%
Integrated Relatively high gearing
Large capex and working capital requirements
25%
Formulator Increasing gearing
Increased working capital requirements and capex for 0%
product spend
Technical Low gearing
Moderate expansion in recent years

Debt Distribution 2013-14E

Short term debt

2014 CRISIL Ltd. All rights reserved.

Gearing - Times

Gearing Trend

Long term debt

11

Debt protection metrics comfortable

Interest Cover Trend
14.00

0.72

12.00

0.60

10.00

0.48
0.36

15.00

6.00

10.00

0.24
0.12

2.00

0.00

0.00

Intermediate

2009-10

2010-11

Technicals

2011-12

2012-13 2013-14E

Integrated

Formulator

20.00

8.00
4.00

2008-09

25.00

5.00
0.00
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14E

Intermediate

Integrated

Formulator

Technicals (RHS)

Source:CRISIL Ratings

Formulators have better debt protection metrics, followed by technical players, because
of healthy profitability

2014 CRISIL Ltd. All rights reserved.

0.84

Times

NCATD - TImes

Net Cash Accruals/Total Debt Trend

Integrated players capex spend in recent years impacted their debt protection metrics
Intermediate players have relatively modest debt protection in line with higher reliance
on debt and low profitability
Debt protection metrics in all segments are, however, adequate for the rating category

12

 2014 CRISIL Ltd. All rights reserved.

Rating differentiators and Trends

13

Default

Moderate Risk
Risk

Moderate Safety
Safety

Adequate
Safety

High Safety

Ratings in adequate and high safety categories dominated by large formulators and integrated players

High Risk

2014 CRISIL Ltd. All rights reserved.

Niche

Intermediate Technical

Integrated Formulator

Business differentiators: scale, integration and

product strength

Scalability is high for formulators and integrated players with healthy product portfolio
Some integrated players also sell technicals to third parties
Some large formulators source inputs from group companies as well
Large technical players have the benefit of export avenue
Small players in adequate safety category include those in niche segments/consolidated with group companies

Ratings of players below Moderate Safety category are constrained by

Small scale of operations driven by limited geographic reach/product mix

Commodity-like products
14

Portfolios ratings remained stable over time; few changes

recently
Rating Movement

Drivers of rating changes in FY13 and FY14

42

38

40
30
30

1 -2

-2

7
-1

-6

3 -5

2010-11

2011-12

2012-13

-2

0
-10

2008-09

2009-10

No of companies rated
Downgrade/change in outlook

2013-14

Upgrades/change in outlook

Upgrades dominant among large players, while

downgrades predominant in small players

Large players
75%

Small players
25%

Continuous
improvement in
financial risk
profile and
expectation of
healthy cash
generation

Plant shutdown
following fire/
pollution control
issues
Ban on key products
Steep increase in
imported inputs and
impact on margins
Larger-than-expected
debt-funded capex
Moderation in
financial risk profile
following increase in
working capital and
debt

DOWNGRADE

10

13

UPGRADE

20

25

Improvement in
business risk
profile following
commissioning of
new capacities,
product launches,
acquisition of
clients

2014 CRISIL Ltd. All rights reserved.

48

50

Large players
38%

Small Players
63%

15

 2014 CRISIL Ltd. All rights reserved.

Key Challenges and Opportunities

16

Key risks and challenges required to be monitored

Pesticides toxic by design
28 active ingredients banned in India against 99 banned globally
Endosulfan, a key insecticide, was banned in the recent past

Environment and
pollution
compliance

Around 30% of capex in industry is towards pollution control

Shift to agrochemical hubs

Working capital
management

Stretch in working capital predominant among small players

Working capital requirements will remain large

Import dependence

Forex Risk

2014 CRISIL Ltd. All rights reserved.

Product risk

60% of rated firms have high import dependence (>30%)

Imports mainly from China (34%), US (23%), and Germany (10%)
Global disturbance in supply impacts importers

About 95% of the rated players have forex exposure

However, about 88% are insulated from forex risk because of prudent
hedging practice

17

Opportunities
Acquisition and business tie-ups
MNCs

Large Indian Generic

Key Players

Bayer, Syngenta, BASF,

United Phosphorous, Rallis,

Insecticides India, Gharda Chemicals,
PI Industries.

Drivers

To increase no. of
products/registrations

To increase market penetration

Strategy

To increase market
penetration

Co-marketing and licensing

with established Indian
generics players

Acquiring smaller Indian generic

players with strong
products/registrations

Small Indian Generics

Local and regional companies

Acquisition targets for

financially sound generic
players and MNCs wanting to
enter the Indian market

Collaborating (co-marketing/inlicensing) with global innovators for

specific molecules/products.

Herbicides and bio-pesticides to grow at a much faster pace

Related diversification Seeds and farm equipment

2014 CRISIL Ltd. All rights reserved.

18

 2014 CRISIL Ltd. All rights reserved.

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 2014 CRISIL Ltd. All rights reserved.

Annexures

20

Arable land to remain constrained...

However, nominal increase in yield as seen in

past

Is likely to improve food production

Nevertheless, per-capita availability will be sub-par

Source: Indias Economic Survey 2012-13 and CRISIL

Ratings

2014 CRISIL Ltd. All rights reserved.

Growth planks - Indias structural advantages to aid

domestic markets

21

India lags in crop yield and pesticide consumption

Average pesticide consumption per hectare - LEAST

Source: Food and Agriculture Organization (FAO) and Indias Economic Survey
2012-13

The delta observed in the graph above spells

immense opportunity for the Indian agriculture
industry, including agrochemical players.

2014 CRISIL Ltd. All rights reserved.

Average crop yield of India vs top 10 producers excluding

India - LOW

Low penetration levels indicate that market

is still evolving and has a strong upward
potential.

22

2007-08

2013-14E

2018-19P

Better intellectual property (IP) protection for products and low cost

2014 CRISIL Ltd. All rights reserved.

Export markets to post CAGR of 8-10% over medium

term

Custom synthesis and contract manufacturing offer good potential

Key Drivers
Increasingly stringent pollution control norms in other countries

South America is a key growing market

23

Changes in consumption pattern observed in recent

years

2014 CRISIL Ltd. All rights reserved.

Pesticide Consumption Pattern

Source: CRISIL Research

Key drivers:
Rise in farm labour cost
Advent of genetically modified (GM) seeds
24

Intermediate

Technical

Formulation

Integrated

Excel Industries CRISIL A/Stable/CRISIL A2+

Gharda Chemicals CRISIL

AA-/Stable/CRISIL A1+

B R Agrotech Ltd CRISIL

A+/Stable/CRISIL A1

UPL Ltd CRISIL

AA+/Stable/CRISIL A1+

Savla Chemical Ltd CRISIL

BBB-/Stable/CRISIL A3

Bayer Vapi Pvt Ltd CRISIL

AA/Stable

Bharat Insecticides Ltd

CRISIL A+/Stable/CRISIL A1

Rallis India Ltd CRISIL

AA/Stable/CRISIL A1+

TML Industries Ltd CRISIL

BB-/Stable/CRISIL A4+

Bharat Rasayan Ltd CRISIL

A+/Stable/CRISIL A1

Sulphur Mills CRISIL

A+/Stable/CRISIL A1+

Bayer CropScience Ltd

CRISIL AA+/Stable/CRISIL
A1+

Reshmika Minerals &

Chemicals Pvt Ltd CRISIL
BB-/Stable

Hyderabad Chemicals
Products Ltd CRISIL
A/Stable/CRISIL A1

Krishi Rasayan Exports Pvt

Ltd CRISIL A/Stable/CRISIL A2+

PI Industries Ltd CRISIL

AA-/Stable/CRISIL A1+
Gujarat Insecticides CRISIL
A/Stable/CRISIL A1

2014 CRISIL Ltd. All rights reserved.

Segment-wise - CRISIL rated key players

Indofil Industries CRISIL A/Stable/CRISIL A2+

Excel Crop Care CRISIL
A+/Stable/CRISIL A1

25

What if the monsoons fail? Will the momentum falter?

Source: India Meteorological Department and CRISIL

Ratings

FY10 was a drought year. But with 50% of companies sustaining 12%+ growth rate, overall performance was stable

Organised players have managed business volatility better than small and mid-sized players,
and those with limited diversification.

Large and integrated operations, healthy product portfolio, established brands, and
operations in multiple markets have supported stability

2014 CRISIL Ltd. All rights reserved.

Monsoon and Players Revenue Trend

Despite prediction of sub-par monsoon this year, the domestic agrochemical sectors revenue
growth is unlikely to be significantly impacted, given diversity in products and markets.
Small players - Revenues size < Rs 300 Cr
26