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Ajay Koti |Shaik Nadeem Azmathulla |Shruthi Komanduri

Alpha Seekers
According to World Economic Forum, growing demand for food, water and energy is one of the
megatrends by 2030 globally. A perennial growth in population will lead to a scarcity of resources. PWC
estimates a 35% increase in demand for food by 2030 to cater to the population of 8.3 billion.
Agriculture continues to be the backbone of Indian economy with about 50% of the population
dependent on it. Agriculture contributes 16% to GDP and about 10% to the total exports. However, agriculture
in India is highly monsoon dependent and only 45% of the land has access to irrigational facilities.
Additionally, about 15-25% of the potential crop gets wasted due to pests, weeds and diseases. Hence, to cater
to the growing food demand of increasing population, the productivity of the arable land is of utmost necessity.
Consequently, usage of agrochemicals plays an important role.
India is the fourth largest producer of agrochemicals globally with a market size of $4.4 billion in
FY2015 and is expected to grow at an annual rate of 7.5%. India is one of the largest exporters of
agrochemicals. Exports constitute about 50% of the agrochemical production in India. 80% of the agrochemical
industry in India produces generic pesticides which are non-patented molecules.

Indian agrochemical market (USD





2015 2020
Domestic (USD bn) Export (USD bn)

SWOT analysis of the agrochemical industry:

Strengths: Weaknesses:
- Low manufacturing costs coupled with - As agriculture is heavily monsoon
international quality standards will help dependent, there will a seasonal demand
penetration into the global markets for agrochemicals
- India is a leading exporter of - Low spending on R&D
agrochemicals - Low brand awareness; hence, there are a
lot of spurious products in the market
- Supply chain inefficiencies
Opportunities: Threats:
- Perennial rise in demand of food grains - Low priced imports from China
and Government’s focus to ensure food - Decrease in the use of chemical
security will increase crop production in pesticides due to the toxicity awareness
turn increasing the demand for pesticides (However, the demand for bio-pesticides
- Expiry of patents in the global market is bound to increase)
- Relaxation of FDI limits
Bharat Rasayan Limited:
Bharat Rasayan Limited (BRL) manufactures technical grade pesticides and intermediates conforming to
international standards. BRL has two technical grade pesticide manufacturing facilities at Rohtak (Haryana) and
Dahej (Gujarat). The capacity utilization for both the plants in 100% in the peak season and around 80% in the
lean season. Dahej plant is currently expanding from 12300 MT to 29200 MT. There is a new capital
expenditure of ~INR 310 crore for Sakhya Greenfield expansion. Sakhya, when operational will reduce the
single plant risk for BRL. In 2014-15 when a lot of agrochemical companies, could not perform well due to the
unfavorable monsoon, BRL registered a high net sales growth.
Competitive advantage:
1. Contract manufacturing contributes to around 20%-25% of the company’s revenues. BRL is planning
to manufacture patented molecules to the MNCs and scale up that segment of business. It supplies to
Japanese agrochemical majors Syngenta, Nissan etc., currently. Japanese agrochemical manufacturing
companies are on a look out to shift their manufacturing from Japan and China to India and BRL has an
opportunity to manufacture these molecules.
2. BRL is always on a look out to add new products to its pipeline. It works on the molecules whose
patents are expiring to further consolidate its position in the market. In the 2014-15 season, addition of
new molecules like Diafenthiuron and Fipronil also contributed to the sales growth.
3. The company has competitive advantage in synthetic pyrethroids and intermediates. Company majorly
produces molecules having low competition which helps them to achieve higher margins at low
volumes of production giving them the first mover advantage.
4. They have made a capex of INR 510 crore in new plants to reduce the dependency on China for
imports and to achieve better margins in the untapped market.
5. In a sector which is affected by supply chain inefficiencies, BRL facilitates advanced planning and
seamless working in the supply chain functions through enough investments in plants and equipment.
The company has internal control systems which are set up by the management to achieve operational
efficiency and optimal utilization of resources.
6. They have long term relationships with their customers which is have grown with time. Price is not
the only determinant factor for the relationship. It depends on past track record of timely delivery and
purity. They understand their customers’ needs and manufacture products according to the demand.
Growth opportunities for the industry:
1. Off patent products and export opportunities: Pesticides worth USD 6.3 billion are expected to go off-
patent by 2020. This provides significant export opportunities for Indian players. The share of the
patent products globally is expected to reduce from 20-22% to ~13-15% by 2020 as a result of the patent
cliff. Exports currently constitute almost 50% of the industry turnover. Most of the export products are
off patent products.
The key growth drivers are India’s capability in high quality of molecules, low cost manufacturing,
availability of technically trained manpower, seasonal domestic demand, better price realization
globally and strong presence in generic pesticide manufacturing.
2. Expansion of opportunities in the international market: BRL is looking to expand its presence in the
international markets. It is planning to forge long term contracts with Japanese manufacturers which
would bring steady in flows. Brazil is a large market for agrochemicals and BRL has applied for
registrations of around 5-7 molecules in Brazil. It expects around 15-20% of its revenues from Brazil.

3. Low per hectare yield: As per Indian agriculture census 2010-11, per capita arable land availability in
India has consistently declined from ~0.34 ha in 1950s to ~0.15 ha in 2000s. With rising population, it is

further expected to reduce to ~ 0.07 ha by 2030. As per World Bank statistics for FY14, per hectare
yield in India is also amongst the lowest in the world.
Per hectare consumption of agrochemicals in India is under 0.6kg - one of the lowest among major
economies of the world- compared to 5-7kg per hectare in US and 11-12 kg per hectare in Japan. In
order to sustain the growing demand for food grains it becomes inevitable to increase the usage of
Pesticide consumption (kg/ha) 0.34 Per capita arable

12 13

7 7 0.15
5 5
0.08 0.07

India UK France Korea USA Japan China Taiwan

1951 2001 2025E 2030E

Management quality:
The top management of BRL are senior entrepreneurs with more than 30 years of experience in the
agrochemical industry. The management has effectively managed the shareholder capital in the past and is
conservative when it comes to costing. At present, the promoter holding is ~75% suggesting their confidence
in business. Company has not diluted share capital in past and even had not issued any major warrants.
Dividend payout ratio is minimum as company needs capital for Capex and has been reducing debt by using
internal cash flows. The promoters do not take any loans from the company.
Bharat group comprises of three companies: Bharat Rasayan Ltd. (BRL), Bharat Insecticides Ltd. and Bharat
Agrotech Ltd. Bharat Rasayan Ltd, is the flagship company of the Bharat group. BIL purchases molecules from
BRL and manufactures the finished formulated product. BR Agrotech was established to tap into the extensive
capacity in toll manufacture. The intercompany transactions between the three happen at market prices. The
group derives cost advantage from the integrated operations through lower dependence on import of
technical grade.
The debtor days had to be increased to secure contracts from large MNCs that are planning to shift base to India
to de-risk from China (which gives credit for 6 months). It must be noted that the management increased the
debtor days which the balance sheet can afford. The promoter’s remuneration is ~16% of the PBT.
Risks to investment thesis:
1. Working capital-intensive business – The company is involved in the manufacture of technical grade
chemicals which is a capital-intensive business with higher working capital cycles. The operations of
the company are working capital intensive and it has an operating cycle of 80 – 100 days primarily on
account of high inventory and receivables. However, the company has generated positive cash flow from
operations in five out of six last financial years.
2. Dependence on monsoons – The agrochemical business and demand for the company’s products are
highly linked to the monsoon performance thereby exposing the company to vagaries of nature
3. Linkage to crude oil prices– Crude oil is one of the essential raw materials in the manufacturing of
technical grade pesticides. The persistent increase in prices of crude oil has adverse effects on the
agrochemical industry.

4. Seasonal demand for agrochemicals– As the crops is mainly sown in the Rabi and Kharif season, the
demand for agrochemicals is seasonal, with a skew towards the Kharif season which account for 70% of
the yearly pesticide consumption.
Industry comparison
Sales Profit
Mar Growth Growth Debt / Current Debtor Piotroski Altman Z-
Name CapRs.Cr. P/E EV/EBIT ROE% 5Yrs% 5Yrs% Eq ratio Days Score Score
UPL 51,991 30.9 23.7 25.1 13.6 22.0 2.0 1.7 127.2 6.0 4.5
P I Inds. 15,123 37.1 31.2 20.8 14.6 30.6 0.0 2.1 84.4 4.0 9.6
Rallis India 2,899 18.7 14.8 12.5 3.2 0.4 0.1 1.7 82.6 6.0 4.4
Dhanuka Agritech 1,825 16.2 13.7 21.8 10.6 14.7 0.0 3.6 78.9 6.0 9.3
Bharat Rasayan 1,750 15.5 11.6 38.9 33.7 57.9 0.6 1.9 102.1 8.0 9.4
Insecticid.India 1,421 11.6 10.2 16.6 13.7 19.4 0.5 1.6 79.9 7.0 4.3
Industry Average 12,501 21.7 17.5 22.6 14.9 24.2 0.5 2.1 92.5 6.2 6.9
We compared key ratios and metrics of Bharat Rasayan, in 2018, to its major competitors in the pesticide
1. In terms of market capitalization, the size of Bharat Rasayan is small compared to its peers.
2. BRL had stellar sales and profit growth over the last five years along with a high ROE as compared
to the industry average. This can be attributed to the competitive advantages of the firm, as mentioned in
the previously.
3. P/E and EV/EBIT ratios are less than the industry average. We expect a re-rating of P/E to industry
average after two new plants are set up.
4. BRL’s debt ratio is close to the industry average of 0.5. Given the company is expanding, we expect
this to increase soon.
5. The company has a healthy amount of current assets to cover its current liabilities. The current ratio
is slightly lower than the industry average.
6. Piotroski F score is much higher than the industry average. It has a score of 8, which signifies that it is
in a strong financial position.
Financial ratios for FY 2018 and 2019
Ratio 2018 2019
Operating Profit Margin 19% 19%
Net Profit Margin 17% 16%
Profitability Ratios
Return on Equity 39% 32%
Return on Assets 26% 20%
Debt/Equity 0.43 0.60
Solvency Ratios Total Liabilities/ Total Assets 0.41 0.46
Interest Coverage 7.50 8.81
Total Asset Turnover 1.81 1.57
Fixed Asset Turnover 5.68 6.57
Days Receivable O/S 78.75 92.10
Activity ratio
Days Inventory Held 62.38 58.20
Days Payable OS 18.97 15.28
Cash Cycle 122.16 135.01

Financial Analysis of key ratios
1. Profit margins – The company has been posting healthy operating profit margins of 19% and net profit margins of
around 11% in the recent past. These margins have been on an increasing trend with the operating profit margins
increasing from 6% in 2008 to 19% in 2019. The reason for such strong operating margins is the continuous reduction
in the material cost which has reduced from close to 76% of revenues in 2008 to around 65% presently. Going
forward, the company is investing Rs 200 crore to manufacture chemical intermediates required. According to the
discussions in the AGM, this backward integration is expected to reduce material costs by 15-20%. This would lead
to a further increase in profit margins
2. Return on Equity – The company has consistently maintained a very high ROE of over 30%. Other companies in the
agrochemical industry like PI industries, UPL have an average ROE of around 20-25%. This indicates that the
company possesses sustained competitive advantages due to which it can maintain a high ROE over long periods of
time when compared to other players in this space. The company can do so despite reducing leverage, indicating that
the drivers for the high ROE are the net profit margin and high asset turns which is sustainable. Going forward we
expect the company to continue maintaining a high ROE and reinvest the incremental profits at high rates which would
compound earnings.
3. Cash generation potential – Companies in the agrochemical space usually must extend long credit periods to their
customers. Due to distress in the rural economy in the last 2-3 years, most formulation players, who are customers of
BRL, also had to increase their debtor days resulting in an increase in receivable days for our company as well. Due to
this and increases in inventory, a lot of cash gets tied up in working capital needs. In 2018, the company generated INR
150Cr as profit from operations in which INR 86 Cr was tied up in working capital needs and hence after taxes the
company was able to generate only 29Cr as cash flow from operations. However, even with the tight working capital
constrains the company has been able to compound sales at 22% and compound profits at 40% over the last 3 yrs
while paying down debt in parallel. In AGM discussions, the promoters of the company have expressed confidence in
collecting the entire receivables due. Going forward, as the distress in the rural economy reduces, we expect the tight
working capital requirements to reduce and the cash generation potential of the company to increase.
Balance Sheet
Year 2018 2019 2020 (Projected) 2021 (Projected)
Equity Share Capital 4.25 4.25 4.25 4.25
Reserves 294.00 405.00 534.69 696.91
Borrowings 128.00 247.00 225.00 215.00
Other Liabilities 41.63 55.43 55.43 55.43
Trade Payables 35.37 44.57 54.38 66.34
Total 504.00 756.00 873.75 1037.93

Net Block 148.00 154.00 187.88 229.21

Capital Work in Progress 7.00 31.00 0.00 0.00
Investments 0.00 0.00 0.00 0.00
Other Assets 2.65 69.73 69.73 69.73
Inventories 94.17 210.22 256.47 312.89
Trade receivables 221.61 280.34 342.01 417.26
Cash Equivalents 4.99 9.42 16.12 7.29
Loans and Advances 25.58 1.54 1.54 1.54
Total 504.00 756.00 873.75 1037.93

Income Statement
Year 2018 2019 2020 (Projected) 2021 (Projected)
Sales 792.00 992.18 1210.46 1476.76
Expenses 639.00 805.08 982.20 1198.28
Operating Profit 153.00 187.1 228.26 278.48
Other Income 10.00 0.75 0.92 1.12
Depreciation 11.00 16.89 11.27 13.75
Interest 16.00 15.82 22.50 21.50
Profit before tax 136.00 155.14 193.57 242.11
Tax 0.28 43.61 63.88 79.90
Net profit 98.00 111.53 129.69 162.21

*Sales Growth: 22% for 2020 and 2021

Sales (in cr)

438 451
58 67 103 99 94 142

Cash Flow

2018 2019 2020 (Projected) 2021 (Projected)

Cash Flow From Operations 16 29 65 78
Cash Flow From Investing 8 -31 -14 -55
Cash Flow From Financing -24 2 -45 -32
Net Cash Flow 0 0 7 -9

Projected market capitalization in 10 years

Method I
We projected the market cap using two methods. In the first method, we use asset turns and capex to project the
sales, whereas in the second method we use projected sales based on CAGR of historical sales and industry
average sales.
Value (In Cr)
Net Block 154
Current Sales 992
Return Fixed Asset turns 6.44
New Fixed Asset 664
Projected Sales 4,277
Projected Earnings 483
P/E (Projected) 22
Projected Market Cap 10,624

The company in 2019 has a net block of INR 154Cr which generated current sales of INR 992Cr.Thus,
the company has a fixed assets turnover of 6.44. We can project future sales using the fixed asset turnover ratio.
The company has planned two capex projects costing a total of INR 510Cr to expand capacities which would
bring the new fixed assets of the company to INR 664 Cr. The sales for the company once both the plants are
fully operational can be projected using the same asset turnover ratio. The projected sales thus calculated would
be INR 4277Cr and the projected earnings would be INR 483Cr.
We project the terminal P/E ratio of the company 10 years later to be 22 thus bringing the total market
capitalization of the company to be INR 10624 Cr. This would imply a price CAGR of 19.84% from the
current market cap of INR 1738Cr.
This is a very conservative estimate as it doesn’t assume any further capacity expansions in the next
10years. Any further Capex planned by the company would further increase the sales and earnings.
Method II

Value (In Cr)

Net Block 154
Current Sales 992
Sales in Yr 10 5,393
Current Net Profit Margin 11.3%
Project Earnings Yr 10 609
Projected P/E 22
Projected Market Cap Yr 10 13,395

Due to the competitive advantage we expect Bharat Rasayan to grow at least at 22%, for the next five years and
then we project it to grow at an industry average of 15%. Based on this we project the sales on 10 th year to be
INR 5,393Cr. Using the current net profit margin, we project the earnings in year 10 to be INR 609Cr. We
expect the P/E to increase from 15 to industry average 22 in the next 10 years. By multiplying the projected
earnings and P/E we project the market cap in ten years to be INR 13,395Cr. This would imply a price CAGR
of 22.57%.
Potential re-rating/ de-rating:
We expect the stock’s P/E ratio to be re-rated to at least the industry average of 22 due to the following
1. Expanding margins – Operating margins are expected to increase as the manufacturing costs will reduce due
to the backward integration through expansion at its Dahej plant
2. Capacity expansion – BRL is expanding capacity at its Dahej plant with a 200-crore capex and planning a
greenfield expansion at Sakhya worth 310-crore. These capex projects would be growth drivers for the
company in the future leading to expanding sales and profits
3. More visibility with higher market capitalization: The company has little following from analysts in the
space due to its low market capitalization. We expect that as the market capitalization of the company
increases, analysts would start tracking the company which would lead to a re-rating of the stock given its
strong fundamentals and high growth opportunities
4. Government Focus on Agricultural Sector – Recent focus of government on agricultural sector will push the
growth of the overall pesticide industry. Under the Kisan Samman Nidhi scheme, the government declared
an outlay of INR 75,000 crore for FY19 and INR 20,000 crore for the farmers which will boost farmers
spending on pesticides