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How K V Kamath built ICICI

In 1955, seven years since India had become independent, it was also the time to rebuild the nation and industrialisation was the only way forward.

It was at this time that with the initiative of the World Bank and the Indian government, that the Industrial Credit and Investment Corporation of India, ICICI, was formed.

Sixteen years later in 1971, to give a new lease of life to its rather nondescript existence, the corporation hired a batch of young business graduates. Among them, was 24-year-old Kundapur Vaman Kamath; fresh out of management school in Ahmedabad. In time, Kamath would redefine banking in India and become a legend in his own right.

Mangalore-born Kamath joined the Project Finance Division of ICICI as a management trainee in 1971. A quick learner, Kamath demonstrated his entrepreneurial skills early in his career and his sheer talent caught the attention of the then chairman of ICICI, N Vaghul.

Kamath set-up new businesses in leasing, venture capital, credit rating as well as handling general management position. Taking his responsibilities a step further, he implemented ICICI's computerisation programme, which in later years would give ICICI a huge competitive advantage.

For 17 years, KV Kamath looked beyond the obvious to create value for ICICI. In 1988, an opportunity came calling that would take him beyond the shores of India.

Managing Editior of The Smart Manager, Gita Piramal, told CNBC-TV18, "Kamath was with ICICI for 17 years before he decided he needed a change. He went to Manila to the Asian Development Bank [Get Quote], and this was an absolutely critical turning point in his career. He learnt about new processes, how emerging markets work, he learnt to deal on a global international scale and this was absolutely important when he came back to India. He was with the Asian Development Bank for about eight years before he got a call from his mentor."

Chairman at ICICI Bank [Get Quote], N Vaghul, recalls, "Within a few months of my joining I had interacted with Kamath. Kamath was at that time in the leasing department and I had more or less made up my mind that he would be my successor."

By 1994, the impact of the economic reforms initiated by the Narasimha Rao government were beginning to show, albeit rather slowly. The same year, ICICI Limited had set up its subsidiary -- ICICI Bank. Two years later, in 1996, Vaghul's protege KV Kamath rejoined ICICI as its new Managing Director and CEO.

Kamath immediately initiated strategic initiatives and structural changes across the ICICI Group that helped redraw its boundaries and take it to the next level. MD & CEO, ICICI Bank, KV Kamath says, "An organisation, which is 40 years old, you need to move some people into some positions, in which you think they would be better of and that's what was on top of my mind."

Kamath's immediate priority after his return was to create new operations in the organisation and more importantly, to tap new markets. He introduced flexibility in the bank's functions and shaped them to respond to new market reactions.

The company was now laying the foundation to become a financial powerhouse, but Kamath had a mammoth task ahead.

Piramal explains, "Kamath had a daunting assignment to get a banking license. This was a very important moment because the Indian government had not issued licenses since Indira Gandhi had nationalised banks. But at this juncture, the government did issue licenses and there was a mad scramble for them. Amongst those who managed to get it -- the Times Group, the Hindujas, Kotak and of course ICICI. But this was just the beginning - he had far bigger dreams."

The visionary banker saw an encashable opportunity in the retail banking space. ICICI's strategy and product offering recognised the changing demands of a growing middle-class.

Deputy MD, ICICI Bank, Chanda Kochhar, says, "When we rolled out the retail strategy in a big way -- that was again a huge change and therefore a hugely enriching experience because at that time, the entire consumer finance business was very nascent for the country as a whole. So, we really had to create a vision of what this business is going to be like for the country and of course it was absolutely new for ICICI. One was really moving in uncharted territories and taking decisions, taking a call as one moved along and learning alongside."

Retail financing in the mid-1990s was an open field, with no major players and Kamath recruited a young bunch of strikers who would score winners for him. In 1997, ICICI became the first Indian financial institution to go online. At a time when word was experiencing the dotcom boom, Kamath was quick to sense the shift in customer demands.

Fighting skeptics, Kamath went ahead with a plan to offer a multi-channel delivery system to its customers. Starting with just 5,000 online customers, ICICI today serves over 2.5 million people online. It opened the floodgates of a unique success story.

By the end of the 1990s, Kamath had chalked out ambitious plans to spruce up ICICI from within. Supported by an able group of young aspirants who believed ICICI had places to go.

Impatient by the dream and brimming with confidence to make ICICI a market leader, Kamath would soon take crucial steps that would influence the fortunes of this financial institution.

In September 1999, within three years of taking over as the Managing Director and CEO of ICICI, KV Kamath drew up aggressive plans for growth. That year, ICICI Ltd got listed on the New York Stock Exchange, NYSE, the first ever Indian financial institution to go the American Depositary Receipts, ADR route.

The next year, ICICI Bank followed suit and its ADRs made a debut at $14 on the NYSE, at a premium of over 27% over its issue price of $11.

Post the listing with the NYSE; ICICI had ambitious expansion plans and this time, it was through inorganic growth. The process had begun way back in 1997 and between 1997 and 2001; Kamath engineered a string of acquisitions like SCICI Ltd, ITC Classic Finance, which had a strong retail base in Eastern India and a strong base in the West.

Most significantly, it acquired Bank of Madhura at a time when its own revenues stood at Rs 2,500 crore (Rs 25 billion) and that of the bank at Rs 100 crore (Rs 1 billion), it was time for the next courageous move.

The year 2002 was the landmark year for ICICI, the board of directors of ICICI and ICICI Bank approved the merger of the parent company ICICI and subsidiaries like ICICI Personal Financial Services Ltd and ICICI Capital Services Ltd, with yet another subsidiary ICICI Bank.

The entire banking and financial operations of the group was bought under one roof. It was a reverse merger and quite rare in corporate India, where a parent company merged with its subsidiary and adopted the later's identity.

KV Kamath explains, "The bank was the entity into which ICICI Ltd went backwards into. You did not then have to address the issues of regulatory clearance to do a whole lot of things because the bank already had those approvals and that facilitated the whole process and that was the critical reason. The other reason to use this route, was to clean up ICICI Ltd at the time of the merger and the only way we could do it was, if ICICI Bank was the entity into which ICICI Ltd merged."

Soon after the merger, it was time for ICICI now in its new avatar ICICI Bank to takeoff and win new markets as well as look for horizons beyond the Indian seas. In 2002, ICICI set up offices in New York and London.

The very next year it established subsidiaries in Canada and also joined hands with Lloyds [Get Quote] TSB in the UK. Offshore banking units were set up in Singapore and representative offices in Dubai and Shanghai.

Kamath's passion for growth was fanning ICICI Bank's burning ambition to grow beyond its dreams and to achieve it, he added a new weapon to his armoury -- technology.

He introduced ATMs across the country using current technology as an enabler. ICICI Bank had experienced a growth rate of more then 180% in its very first year and a separate majority owned company called ICICI Infotech supported the IT operations of the banking section. But it was the innovative idea of introducing ATMs, that tips the scales in their favour.

Kamath says, "To set up an ATM, you need three-four levels of redundancies. You set up recycling, you have to have a lease line, a dial-up line and you are still not sure the ATM would work 94-95% of the time. Today, you have ATMs available 99.99% of the time. So, there were these risks but we bet on technology."

Piramal adds, "Kamath found himself sandwiched between State Bank of India [Get Quote] and the foreign banks who had an excellent retail presence. One of the ways is to meet the shortfall of being able to offer branch facilities, and at that time ICICI had just 50 branches. To meet that shortfall, Kamath hit upon an absolutely winning strategy and that was to install ATMs across the country."

There are many who dream big and let their dreams fade. . . to die forgotten deaths. But there are still a few who nurture their dreams, give them wings and then turn them into realities. These are the people who make a difference and that's precisely what KV Kamath did.

With the turn of the millennium, ICICI emerged as the largest private bank in India and fueling its growth was the untiring efforts of one man -- KV Kamath. He rightsized the organisation, expanded internationally and gave a fillip to its technology driven expansion plans, and then Kamath set his eyes on making ICICI a universal bank.

He had a vision and it was to create an international banking experience in the country, which would provide complete financial services to different classes of customers.

For the first time ever, the rural community was included. With the use of technology, the bank started tapping into the micro- banking space in rural India, utilizing partnerships with multinational and local agricultural institutions.

Kamath repeated his earlier success with ATMs, when he introduced cross-selling in ICICIs banking system. He recognized the inconvenience faced by busy customers and brought in direct selling agents, who would reach customers easily, identify prospects and initiate dialogue. This not only helped ICICI deliver personalized banking facilities, but also changed the banking experience in India forever.

Joint Managing Director at ICICI Bank, Lalita Gupte, says, "When I look at the vision for ICICI Bank in the next 10 years, I think major changes will take place. I see a very bright future ahead and I see the aspiration has been to move into the top league in the world - in top 25-50. This in a way reflects the place India will actually find in the global economy."

"Several Indian corporates are going overseas in acquiring businesses and expanding into the global marketplace. Mr Kamath is a visionary and I do see that this will definitely have an impact on the bank, as we go forward."

Piramal says, "In all the different directions that it was growing, Kamath also had to look after the legacy of the past. He had to streamline and rightsize the organisation. It had 33 subsidiaries, he gradually brought them down step by step from 33 to 24 and then 12 and he prepared the company for an IPO. This was an absolutely critical testing time for Kamath."

In December 2005, ICICI Bank announced its initial public offer to the Indian market and amassed over Rs 80 billion. With a very well defined roadmap, ICICI Bank soon put in place, a formidable plan for its future. With its current asset over Rs 250,000 crore (Rs 2,500) billion and a net profit of over Rs 2,500 crore (Rs 25 billion), with a network of 614 branches and over 2,000 ATMs, ICICI Bank has left its competition years behind.

Kamath's contribution to cutting edge innovations in the banking sector will soon recommence, and as if to acknowledge the years of dedication he has put in to making sure that ICICI Bank stands at the apex -- in 2001, he was named the Asian Business Leader of the Year. A fitting finale one would say. . . but there just might be more coming from him.

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ICICIDirect - Pick of the Week - Havells India Ltd.

Havell’s India is likely to sustain its growth momentum on the back of booming user industries such as construction, engineering and power. The commissioning of new plants for electrical consumer durables – fans, CFL, etc, and switchgears in the excise- free zone of Uttaranchal and Himachal Pradesh would help it to expand its market share and improve margins.

Company Background

Havells India is one of the leading electrical and power distribution equipment companies in the country, manufacturing products ranging from building circuit protection, industrial & domestic switchgear, cables & wires, energy meters, fans, CFLs, luminaries, bath fittings and modular switches. Promoted by Qimat Rai Gupta and S K Gupta, Havell's India was incorporated in August 1983. It started by producing miniature circuit breakers and distribution boards in 1984. It entered into a technical collaboration with Christian Geyer, Germany, to manufacture miniature circuit breakers in India. In 1991, it was amalgamated with Elymer Havell’s, which had facilities to manufacture HRC fuses. The company has set up a new manufacturing facility for MCB's and other switchgear products at Baddi, Himachal Pradesh and an integrated ceiling fans manufacturing unit at Haridwar in Uttaranchal.

Investment rationale

Boom in user industries
Havell’s India is likely to sustain the growth momentum on the back of the boom in the user industries such as construction, engineering and power. Its top line has grown at a CAGR of over 45% during the past 5 years from Rs 171.08 crore in FY01 to Rs 1108.25 crore in FY06. During this period the bottom line grew at a CAGR of over 59% from Rs 6.21 crore to Rs 63.21 crore. Domestic & industrial switch gears, cables and consumer electrical equipment contribute an equal 25% to its revenues while the balance rest 18% and 7% is contributed by wires and the newly acquired Crabtree revenue (cater to premium segment of modular switches and bath fittings) respectively.

The company is in a sweet spot as all its divisions are likely to sustain growth momentum given the ongoing boom in user industries such as construction, engineering and power.

(a) Switchgear Division

Havell’s is the largest manufacturers of MCBs, RCCBs, and distribution boards in India with the market share of around 25% in the market for MCBs. In FY06, switchgear contributed 30% at Rs 329.85 crore to its overall revenue. This segment is the most profitable one with operating margins to the tune of 31.17% in the H1FY07. The company currently exports MCBs to over 45 countries, including the quality conscious European countries. In order to accelerate its growth further, the company is in the process of setting up a 100% export-oriented unit (EOU) at Baddi, which would augment its capacities to 30 million poles of MCBs and would it in the top 10 league of manufacturers in the world.

(b) Cable & Wire Division

The cable & wire segment generated Rs 344.34 crore in the H1FY07 with operating margins of 13.30% at Rs 46.02 crore. In FY06, the cable division grew at 52% YoY to Rs 465.16 crore. The company is recognized as quality manufacturers of cable & wires and offers a complete range of low and high voltage PVC and XLPE cables, besides, domestic FR/FRLS wires, Co-Axial TV and telephone cables. During the FY06, the company had almost doubled its capacity.

(c) Electrical Consumer Durables Division

During FY06, the turnover of the division grew at 109% y-o-y to Rs 274.41 crore while in the first half of FY07, the revenue from the division increased by around 61% y-o-y to Rs 193.87 crore. The company generated operating profit of Rs 24.50 crore with 12.63% margin. In this division, the company expanded its CFL capacity to become the largest CFL manufacturer in the country. The company currently exports CFL to the neighboring countries of Sri Lanka, Bangladesh besides Middle East and African countries. The company has initiated marketing of this energy saving product in the smaller towns and rural areas, which is likely to push the demand and growth of the product.

The electrical consumer business is the fastest growing segment wherein company enjoys market leadership position in compact fluorescent lamps (CFL) segment, which is growing at 40% per annum.

Expansion to sustain growth momentum

The company is undertaking expansion in existing as well as new product categories to widen its offerings and reap the opportunities emerging in user industries. The company is entering into two new segments, electrical motors and power capacitors at a capex of Rs 100 crore which would be funded entirely through internal accruals. Initially the company would manufacture motors up to 100 HP and gradually ramp up to 300 HP in due course. The company also plans to set up a power capacitor unit in Haridwar with an initial capacity of 3,00,000 KVRs. The company hopes to generate revenues of about Rs 36 crore from capacitors and Rs 240 crore from motor business in its first year of operation.

Tax incentives from new plants to expand market share

It has commissioned new plants for electrical consumer durables – fans, CFL, etc. in the tax-free zone of Uttaranchal and Himachal Pradesh. The production in these zones would enable the company to expand market share along with margins. The company hopes to capture a bigger slice of the Rs 1,600 crore electric fan segment from the unorganized sector on the back of tax incentives which would help it to bridge the price differential. Besides pricing power, the company hopes to generate volumes from this segment that is likely to grow at 16% per annum through its innovative product, which consume 33% less power.

Risks & Concerns

1. The company’s principal inputs are aluminium and copper. Copper constitutes almost 40% of the total cost of production of electric equipment. The prices of these metals are currently on an upturn, which may put pressure on the margins. However, the company is able to pass on the incremental cost though with a time lag.

2. The domestic market for consumer electric products is highly competitive with presence of unorganized sector. As the unorganized sector does not pay excise, the company has set up plant in Baddi, where it would have excise benefit through which it would be able to take on the unorganized sector more efficiently.

The company’s top line has grown at a CAGR of over 45% during last 5 years from Rs 171.08 crore in FY01 to Rs 1108.25 crore in FY06. Bottom line grew at faster pace with a CAGR of over 59% from Rs 6.21 crore to Rs 63.21 crore during the same period. For the first half of FY07, the company reported a net profit of Rs 46.90 crore on sales of Rs 786.49 crore. We expect the company to sustain its growth momentum in the current financial year though the growth rate may moderate later due to high base effect. The company is likely to post a net profit of over Rs 95 crore in FY07E on a turnover of over Rs 1600 crore on a conservative basis though the company is targeting it to be Rs 2000 crore.

Valuation

Havell’s India is likely to sustain its growth momentum on the back of the boom in the user industries such as construction, engineering and power. Commissioning of new plants for electrical consumer durables viz. fan, CFL, etc. in excise free zones would also lead to margin expansion. The company is currently trading at Rs 315, 18x the FY07E EPS of Rs 17.45. The company has an impressive return on equity of more than 45%, which along with margins expansion may trigger into further re-rating of stock. We expect the company to generate returns to the tune of 20% over 3-6 months with a target price of Rs 380.

Technical Outlook

The stock is currently trading above its 200 day moving average, which is around Rs 273. The stock has a strong support at Rs 302 level. It made a double bottom at these levels and bounced back to Rs 314 level. On the upper side, if it closes above Rs 324 with good volume, we expect a strong breakout and it could rise to Rs 351 – Rs 380 levels.

ICICI - Blue Bird (India) Ltd

Background

Blue Bird (India) Ltd was incorporated in 1999 as Anil Apporv Printers & Manufacturers Private Ltd and the name of the company was changed Blue Bird in 2005. The company is engaged in making student/ exercise books and stationery, commercial printing and publications. Mr Nitin P Sontakke and Ms Vidya N. Sontakke are the promoter-directors of the company. Mr Sontakke is a diploma holder in Printing Technology and is in this business since 1975. Ms Sontakke is a graduate in science. Promoters’ and other key employees holding will be 52.6% and18.9% of the post issue paid-up equity capital respectively.
The issue

Issue Size: 8,775,000 fresh issue of equity shares of Rs 10 each fully paid-up of which
Employee Reservation: Nil
Net Issue to the Public:8,775,000 equity shares of Rs 10 each fully paid-up
Objectives of the issue

The objective of the issue is to raise capital to set up new manufacturing facilities and expand existing facilities; replenish the internal accruals of the company used for purchase of factory land located at Pune; purchase of existing registered/ corporate office premises presently on leave and licence; capital expenditure for setting up of new regional sales offices, repayment of existing long term debts, augmentation of long term working capital and for general corporate purposes.

Key Investment Rationale

High growth opportunities
Blue Bird derived 87.9% of its revenue from student/ exercise books and stationery for FY06. Growth in demand for these products derives from growth in economy, increase in rates of education and increase in government outlay for the education sector. GDP has been showing a consistent growth rate of 6-7% in last five years and per capita spending on education has also increased from 1.2% of GDP in 1983 to 4.4% of GDP in 2003.

Size of the market for student/ exercise books and stationery is estimated at approximately Rs 8000 crore and is growing at approximately 20% as per AC Nielson ORG MARG survey report commissioned by the company. Organized players have 20% market share and unorganized players have 80% market share. Apart from growth due to increase in demand BBIL has growth opportunities from increase in market share of the organized sector. Being in organized sector the company has advantages of superior quality products, automated production processes, economies of scale and greater marketing resources.

Market leader in paper-based notebook industry
Blue Bird is the market leader with a 48% share in organized segment of the paper-based notebook industry. The total size of this segment is estimated at Rs 743 crore. Due to higher market share BBIL would be the maximum beneficiary of growth in the organized sector.

Nationwide sales and distribution network
Blue Bird has 18 regional sales and marketing offices. Out of this 9 are in Maharashtra, and the remaining 9 are in other different parts of the country. The company is strengthening its network further and has plans to open additional 10 such offices in FY07, 20 in FY08 and 10 in FY09. BBIL expects to have a total of 118 regional offices by FY11.

New plant in south India
The company is setting up a new plant in south India, which will further enhance its market share in that region and also save on transportation costs.

Key concerns

Export obligation
The company has imported some of its equipment under Export Promotion Capital Goods (EPCG) scheme and has export obligation of Rs 52.6 crore by March 18, 2014. In case the company is not able to fulfil these obligations, it will have to make payment of Rs 14.4 crore towards custom duty saved. The company also intends to import machinery under EPCG scheme for the additional manufacturing facility. This will create further export obligations and contingent liabilities for the company.

Financials

Operating income has grown by 21.2% to Rs 400.9 crore for FY06 from Rs 330.8 crore in FY05. EBITDA has grown by 51.7% to Rs 53.0 crore from Rs 34.9 crore. PBT has grown by 42.6 % to Rs 39.3 crore from Rs 27.5 crore. PAT has grown by 42.2% to Rs 25.1 crore from Rs 17.7 crore. The company made an EPS of Rs 10.0 for FY06. For FY06 the company had a RoNW of 49.8% and RoCE of 17.0%.

Valuations

The issue price of Rs 90-105 discounts its FY06 earnings of Rs 7.2 per share on the diluted post-issue share capital by 12.6x - 14.6x. Navneet Publications, which is in the same line of business, is currently trading at Rs 57.5 at a P/E of 13.3x. Valuations of shares at the issue price band are reasonable and growth prospects also look good. We recommend subscription to the issue.

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Sharekhan Investor's Eye - Nov 15 2006

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Thermax Cluster: Emerging Star Recommendation: Buy Price target: Rs340 Current market price: Rs335 Mind-blowing results Result highlights The consolidated revenues of Thermax grew by 23.0% year on year (yoy) to Rs520.2 crore in Q2FY2007, in line with our expectation. The energy segment grew by a robust 20.9% yoy to Rs433.4 crore whereas the environment segment grew by 17.8% yoy to Rs118.7 crore. The company’s operating profit margin grew by 240 basis points yoy and 350 basis points sequentially to 13.9% in the quarter, way above our expectation. The margin growth was attributed to the strong order booking, lower material cost and a shift in the product mix towards the high-margin energy segment. Consequently, the operating profit grew by 48.5% yoy to Rs72.1 crore, again ahead of our expectation. The energy segment continued its robust performance with a revenue growth of 20.9% yoy to Rs433.4 crore and a 430-basis-point expansion in the profit before interest and tax (PBIT) margin to 15.0%. The environment segment too bounced back with a 17.8% year-on-year growth in the revenues to Rs118.7 crore. The margins bounced back in this quarter after remaining subdued in Q1FY2007. The PBIT margin improved by 330 basis points sequentially. The net profit grew by 76.4% yoy to Rs53.7 crore in Q2FY2007, ahead of our expectation. The robust margin expansion, higher other income and lower effective tax rate are attributable to the jump in the net profit. The order backlog maintained its growth momentum during the quarter, recording a strong growth of 11.5% sequentially and of 142% yoy to Rs2,973 crore. The order backlog is equivalent to 1.8x FY2006 consolidated revenues, imparting a very strong visibility to the revenues. Another development during the quarter was that ME Engineering, UK, its loss making wholly-owned subsidiary was referred to the administrator in the UK as its performance was mediocre and it continued to make losses. Due to this event Thermax has provided for Rs23.1 crore as extraordinary expenses in the stand-alone financials. However, the net impact of the above provisions in the consolidated accounts was Rs2.0 crore only. The positive of this event is that in H2FY2007 the performance of ME Engineering won’t be a drag on the company’s results. The stock is trading at a price/earnings ratio of 17.5x FY2008E consolidated earnings and enterprise value/earnings before interest, depreciation, tax and amortisation of 10.1x FY2008E. We continue to remain bullish on the company. In light of the continued growth traction over the last few quarters and the blow-out H1FY2007 performance, we are looking to upgrade our estimates and price target for the company after attending its conference call. Watch this space. ICICI Bank Cluster: Apple Green Recommendation: Buy Price target: Under Review Current market price: Rs881

Leading private banks can breathe easy
The RBI has started granting branch licenses to banks caught in the IPO scam. ICICI Bank has received permission for 100 new branches and 500 ATMs to add to its current network of 625 odd branches and 2,325 ATMs across the country.

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SECTOR UPDATE

Pharmaceuticals

US court rules in Ranbaxy’s favour
A US appeals court has upheld a district court ruling that gave Israel's Teva Pharmaceutical Industries and India's Ranbaxy Laboratories exclusive rights to sell generic forms of Merck & Co. Inc.'s blockbuster anti-cholesterol drug simvastatin (brand name: Zocor).

Banking

Improved performance across bank groups

Key points

• The impressive financial performance is likely to sustain as the banking sector is all poised for improved financial performance in FY2007 on the back of the robust credit demand, improving asset quality and stable costs.
• There has been a significant improvement in the asset quality across all bank groups as the NPAs at the gross and net levels showed a significant improvement due to lower incremental NPAs and historical write offs and provisioning.
• The sensitive sectors are under the scanner and the RBI has been repeatedly coming out with cautionary statements regarding the banks’ exposure to the sensitive sectors, especially real estate. The PSBs have more than doubled their exposure to real estate. However, the exposure still remains lower than the other bank groups at 14.2%.
• The credit growth for the last couple of years has been in excess of 30%. The flow of credit to the different sectors has remained unchanged except for the bank credit to the industrial sector (small, medium and large), which decreased by 200 basis points to 40% in March 2006 compared to 42% in March 2005.
• The new priority sector lending guidelines are negative for foreign banks. The off-balance sheet exposure of the foreign banks on an aggregate is significantly offline than the entire banking sector data mainly due to their presence in the derivatives market. The RBI wants to realign the operations of foreign banks and make direct lending a larger part of their total assets.

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VIEWPOINT

United Phosphorus

United Phosphorus to buy Cerexagri
United Phosphorus Ltd (UPL) is to buy Cerexagri, the France-based crop science business unit with an annual revenue of 250 million euros. Cerexagri specialises in plant protection products, mainly fungicides. The deal size is estimated at around 111 million euros (Rs640.47 crore). Cerexagri has a strong distribution network in the USA and Europe, which accounts for 70% of the company’s revenues. This would be UPL’s fifth acquisition in the calendar year, making it the third largest generic agrochemical company in the world.

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Bhagiradha Chemicals & Industries Ltd. (BHAC)

Bhagiradha Chemicals & Industries is one of India’s largest manufacturers of the best-selling insecticide, Chlorpyriphos. The company is reorienting its strategy and focusing on R&D to drive growth. It is foraying into contract manufacturing of high-value agrochemicals. We expect sales to grow at a CAGR of 22.50% from Rs 77.52 crore in FY06 to Rs 116.3 crore in FY08E, resulting in EPS growing at a CAGR of 44.20% from Rs 17.5 in FY06 to Rs 36.4 in FY08E. We rate the stock an OUTPERFORMER with a 3 to 6-month price target of Rs 189.

Background

Bhagiradha Chemicals & Industries was incorporated in 1994 to manufacture Chlorpyriphos, a new generation insecticide at that time. Chlorpyriphos is an insecticide used on a wide variety of crops such as cotton, chilly, rice, sorghun, soyabean, sugarcane, groundnut, vegetables, ornamentals and flowers. It is used for commercially important plantation crops like citrus, mango and grapevive. Chlorpyriphos also finds application in the preservation of wood and timber.

The promoters, Koteswara Rao and D Sadasividu were previously working at Indian Institute of Chemical Technology (IICT), which has developed several innovative technologies for chemical products (including Chlorpyriphos). The initial capacity of the plant was 300 tonnes per annum (tpa) and this was expanded to 2,000 tpa as on March 2006. The company diversified into producing herbicides in 2004, and has been launching a new product every year. It also has a facility to make bulk formulations of Chlorpyriphos. Its current product portfolio comprises of two insecticides – Chlorpyriphos and Imidacloprid – and two herbicides (Triclopyr and Fluroxypyr).

Investment Rationale

Differentiated business model
Selling agrochemicals in regulated markets requires huge sums for generating the data package required for product registration. Alternatively, the data can be purchased from the original inventor. However, inventor companies demand hefty amounts, making the business unviable. Most Indian companies have thus focused on the domestic market and developing nations where it is easy and cheap to register their products. But the consequence has been too players competing in the same markets. Apart from drastic price erosions, there is also lack of stability in the business since customers can easily switch suppliers. Overcapacity in the agrochemical sector in China has further exacerbated the situation.

In order to overcome these hurdles, Bhagiradha is now reorienting its strategy and focusing on R&D to drive growth. The promoters of Bhagiradha are technocrats who have strong R&D experience. The company has a state-of-the-art R&D center at Hyderabad, which employs 30 scientists and its expenditure on R&D is on the rise with Rs 45 lakh being spent on R&D in FY06 (55% Y-o-Y growth).

Manufacturing pact with Dow AgroSciences
Bhagiradha recently signed a contract manufacturing agreement with Dow AgroSciences for the herbicide Fluroxypyr. Bhagiradha is to supply minimum 250 tonnes of Fluroxypyr per year for the next 4 years. Dow AgroSciences is the original inventor of Fluroxypyr and was its sole producer till now. The global demand for Fluroxypyr is about 1,500 tpa. It is a high-value product and is mainly used in the developed markets. This deal is an important milestone for Bhagiradha since Dow AgroSciences chose it as its partner despite the fact that the two are competitors in the Triclopyr and Chlorpyriphos market. It also vindicates Bhagiradha’s new business strategy of R&D-driven growth since many other Indian companies were also in the race to be the first to develop a generic version of this product.

With an increasing trend of MNCs to outsource molecules that have gone off patent, Bhagiradha will now be the preferred option for Dow AgroSciences in case it decides to outsource more of its Fluroxypyr requirement in the future.

For FY07E, Fluroxypyr volumes are expected to be 250 tonnes, translating into revenues of Rs 35 crore. We expect Dow AgroSciences to increase the quantity to 370 tonnes in FY08E, and revenues rising to Rs 50 crore. Bhagiradha’s bottom line is expected to get a significant boost since contribution level in this product is about 50%. The total investment in the Fluroxypyr plant was only Rs 8.5 crore.

Broad-based product portfolio
For the first 10 years since its inception, Bhagiradha was only manufacturing Chlorpyriphos. In 2004, it decided to diversify into other products to mitigate the risks associated with a one-product. It launched Triclopyr (a herbicide) in 2004, Imidacloprid (an insecticide) in 2005 and Fluroxypyr (herbicide) in 2006.

Revenues from new products now constitute 30% of its total sales. They expected to rise to 61 % by FY08E. Since these are high-margin products, its NPM has also increased to 11.5% in FY06 from 9.5% in FY05.

Product Profile

Chlorpyriphos: This insecticide was launched in 1994 in the Indian market. Initially many companies set up plants for this product based on a breakthrough technology developed by IICT. Chlorpyriphos volumes have grown exponentially since then but its price has crashed from more than Rs 500/kg in 1994 to current price of Rs 260/kg due to intense competition. This led to many smaller companies stopping production. Currently, there are only a few companies still left in the field. They include Bhagiradha, Excel industries, Dow AgroSciences, Gharda Chemicals and Mitsu. Considering the low-margins, Bhagiradha plans to maintain current capacity of 2,000 tpa and use it as a cash cow. It will funnel fresh investments into facilities for new high-value products only.

Triclopyr: This herbicide accounts for 9% of Bhagiradha’s turnover and the entire production is exported. Dow AgroSciences originally developed this product and Bhagiradha, Aimco Pesticides and Punjab Chemicals & Crop Protection Ltd now produce its generic versions. Global demand is approximately 1,500 tonnes and major export destinations are Australia, New Zealand and South East Asia. Triclopyr sales are expected to reach Rs 11 crore in 2007 and Rs 12.9 crore in 2008.

Financials:

The full benefits of the Fluroxypyr deal will be visible from the current year onwards with sales expected to grow by 50% from Rs 77.52 crore in FY06 to Rs 116.3 crore in FY08E. However, net profit would soar by more than 100% from Rs 8.9 crore in FY06 to Rs 18.5 crore in FY08E. The shift towards high-value products will see NPM expand from 11.5% in FY06 to 15.9% in FY08E. RoCE, which was respectable 31.8% in FY06, is also set to reach impressive levels of 39.5% in FY08E. The free cash flow generated would be used to reduce debt through bullet repayments. Debt/Equity ratio is expected to fall from 1.1 in FY06 to 0.3 in FY08E, thus considerably de-leveraging the balance sheet.

Risks & Concerns

MNCs have an option to outsource products from their subsidiaries in developing nations. Syngenta has already done this by making its Indian arm a global sourcing base for the insecticide Thiamethoxam. Unless the patent holder considers Bhagiradha a serious threat, it may not be the preferred partner for its outsourcing deals.

Valuation

The company is currently trading at one of the lowest P/E ratios in the industry. We expect sales to grow at a CAGR of 22.50% from Rs 77.52 crore in FY06 to Rs 116.3 crore in FY08E and EPS to grow at a CAGR of 44.20% from Rs 17.5 in FY06 to Rs 36.4 in FY08E. At the current price of Rs 157, the stock trades at 8.97x its FY06 EPS of Rs 17.5 and 4.31x its FY08E EPS of Rs 36.4. The stock is available at an EV/EBIDTA of 6.39x FY06 earnings and 3.10x FY08E earnings. We rate the stock an OUTPERFORMER with a price target of Rs 189 with a 3 to 6- month timeframe.

Technical Outlook

The stock has formed a good support at the Rs 120 levels and has been in an accumulation mode since then. Stochastic has turned positive and the RSI indicator also signals a BUY. It faces a minor resistance at Rs 160 levels. Volumes have been picking up recently.

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Thanks Akash