Company: Bharat Rasayan

Prepared by : Rohit Balakrishnan

Business Slotting
 B2B  B2C  Asset Heavy (Working capital heavy)  Asset Light  Intellectual Prop  Price Taker
Price Setter Oligopoly
Monopoly/ Duopoly  Customer Capex Led

Company Background:

 Bharat Rasayan, incorporated in 1985 is part of the Bharat Group. Bharat Group has presence in the
agrochemical space with Bharat Rasayan, Bharat Insecticides and Bharat Agrotech as its main
companies. As a group it is one of the top 10 Agrochemical companies in India
 Bharat Rasayan is the only listed entity from the group. The company manufacturers technical grade
pesticides (similar to API for drugs) which are then used by agro-chem companies to make
formulations. Bharat Rasayan counts Bayer, Syngenta, Nissan, Adama among others as its customers.
It also serves many domestic formulation companies.
 The company has 2 plants at the moment – 1 in Rohtak and the other in Dahej. The Rohtak plant has
the capacity of ~ 4000 tonnes and Dahej plant with the recent expansion has the capacity of ~
12,3000 tonnes. It has around 20-22 active molecules as its key products. Its key products include
Metaphenoxy Benzaldehyde, Lambda Cyhalothrin, Metribuzin, Chloropyrophil, Para Chloro Benzene
Cyanide.
 The company generates ~ 62% sales from its top 9 products (H1FY20), 62% in FY19, 52% in FY18 and
70% in FY17 and 77% in FY16 from its top 10 products.
 It generated 52% in FY19 and ~ 35% revenue from its top 3 customers, 35% sales in FY18, 25% in FY17
and 22% in FY16 from its Top 5 customers
 Over the years the company has benefited from the shift of manufacturing facility away from China to
India. Also given the strong execution, chemistry skills and long-standing relationships with its
customers such as Nissan, Bayer etc the company has been able to bag orders and entered into
contract manufacturing (for generic molecules) for MNC agrochem companies. The company has a
stated focus to grow its MNC customer/export revenue and move away from the domestic business
(owing to low profitability)
 The company generates ~ 60% of its business in the H1 and the rest in H2.

Bharat Rasayan 2011 2012 2013 2014 2015 2016 2017 2018 2019 8 year 5 Year
CAGR, % CAGR, %

Exports 28 28 58 59.3 121 126 153 165 225 35% 31%

YoY, % 0% 109% 2% 104% 5% 21% 8% 36%
Group Co's 19 18 26 64 125 127 165 170 226 43% 28%
YoY, % -4% 43% 150% 95% 1% 30% 3% 33%
Domestic Co's 45 94 102 177 189 199 295 475 544 43% 25%
YoY, % 109% 8% 74% 7% 5% 48% 61% 15%

Exports, % 30% 20% 31% 16% 28% 28% 25% 20% 23%
Group Cos, % 20% 13% 14% 18% 29% 28% 27% 21% 23%
Domestic, % 48% 66% 54% 49% 43% 44% 47% 59% 55%

Customer Industry Trend/Outlook ->  Tailwinds  Headwinds  Secular

Company is becoming a credible alternative to China as a mfg base for its customers. Over the years the
company has been able to strengthen its relationship with global agro-chem players.

Few articles highlighting the Issues in China and the purported shift of mfg from China to India
 http://news.agropages.com/News/NewsDetail---32362.htm
  https://www.mckinsey.com/industries/chemicals/our-insights/chinas-chemical-industry-new-
strategies-for-a-new-era
 http://news.agropages.com/News/NewsDetail---29570.htm

To summarize the issues in general w.r.t China are

 Stricter environmental norms in China – leading to high costs and unviability of few co’s
 Rising labour costs
 Concentration risk – Given issues like trade war and Corona virus crisis

Elevator Pitch – Bharat Rasayan is a well-run technical manufacturer. Post the capex in Dahej the company
has been able to ramp up its sales with global agro chem major. Owing to its strong execution, cost
competitiveness, competent chemistry skills and increased backward integration for manufacturing its
share of CRAMS (patented & non patented molecules) is expected to rise. The proof of their strong
execution is evidenced by their recent JV with Nissan Chemcials. CRAMS business is a sticky business and
takes time to ramp up – Bharat Rasayan has been working with its clients for the last 7-8 years and it is now
at a point where external tailwinds, companies’ ability to execute all seem to come together. Company is
also ramping up its export business. Both CRAMS and exports are more profitable businesses

BUSINESS ATTRACTIVNESS

1) Strongly differentiated business model -> Medium, should become High over time if patented
CRAMS share increases

 Evolving into CRAMS player – which is a very sticky business – order book visibility is quite
high. Earnings as a result are predictable
 Co’s has been selling to various agro chem majors like Bayer, Syngenta, Adama and given
their execution and capability – the volumes with such customers are increasing leading to
growth.
 Getting the share of business from global customers is very difficult & time consuming- as a
vendor one needs to show competent chemistry skills, backward integration capability
(China dependence should be a bare minimum for raw materials). Bharat Rasayan has
recently invested ~ 100 Crores to improve this aspect in its Dahej plant.
 The fact that not many players apart from PI have been successful in this shows how difficult
it is to get the trust of customers. PI is largely into patented/innovator molecules- for Bharat
Rasayan this is still a small share, however expected to grow over the next few years.
(Currently <10% expected to grow to 20-30% over the next 3-5 years)
 JV with Nissan Chemicals is a clear show of Bharat Rasayan’s ability to execute on the same.

2) Competitive Position getting stronger/weaker -> Stronger

 Backward integration for its RM – Reduced dependency on China- major competitive
advantage
 Share of business from CRAMS (within that patented molecules) and export should increase
both these segments are more profitable.
 Success in CRAMS will make it difficult for any one to dis-lodge Bharat Rasayan as customers
won’t like to change suppliers

3) Next Level of business -> Medium

 JV with Nissan Chemicals should act as a strong vote of confidence for other
companies/customers to give similar business

4) Value Migration Curve -> High

 India/Indian manufacturers as a potential 2nd source supplier to global agro chem players is a
tail-wind which is getting stronger by the day
 Business mix improving towards patented CRAMS manufacturing increasing in overall mix
  Export business Increasing

5) Quality of earnings -> Medium

 Low gross margins (30-35%)
 Mediocre cash flows- driven by high working capital. CFO/PAT is quite low over the 10 years
However, on the positive side debt levels are still manageable at 0.4x Net debt/equity
 Going forward margins should improve driven by ↑ CRAMS and Exports revenue

FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19 A 9MFY20
CFO/PAT (0.3) 3.2 3.6 1.2 (0.8) 1.4 1.9 1.4 0.3 0.3 (0.5) 1.1
CFO/PAT (2009-2019) 27%
CFO/PAT (2014-2019) 36%
CFO (2014-17) 103%

Cash generated prior to WC Changes 643

Capex -179 -28%
Working Capital -412 -64%
Borrowings 40 6%
Interest Paid -91 -14%
Total 1 0%

6) Key growth drivers

 Capex in Saikha & Dahej -> Dahej capex will be largely for backward integration- should
improve gross/operating margins. Saikha plant is a greenfield capex which should help the
company drive growth in the next 3-4 years. In the AGM the management mentioned Saikha
capex will be 300 + Crores and will be done over phases. Past track record of management to
ramp up sales and utilization is very good -> Medium
 Growth in Export markets -> Medium
 JV with Nissan and other similar contracts with other vendors for CRAMS
 The above + backward integration efforts should help Profit to grow faster than sales

7) Intellectual Property – Low

 Low R&D spend by the company.

Operating Leverage led by  Gross Margin  Asset Turns  Product Mix  Employee Costs

o In the past margin expansion has been driven by better utilization of assets – as
evidenced by gross margins being at 30-35%, but EBITDA margins expanding
significantly- driven by high plant utilization/better absorption of costs as capex have
been largely brown-field in nature.
o Gross Margin & Product mix – Gross margins of the company have been around 30-35%
over the last decade. CRAMS being higher share of business, should improve the gross
margins going forward. Further the backward integration efforts taken by the company
will improve the gross margins. (China dependency to reduce by half).
Also, Exports have higher margins. This should help the overall margins

P&L metrics FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19 A 9MFY20 9MFY19 A
Gross margin 29.7% 30.6% 32.4% 33.9% 33.1% 34.9% 34.5% 35.8% 34.0% 35.5% 31.3% 30.7% 31.7%
EBITDA margin 9.0% 8.5% 7.0% 11.3% 13.7% 17.7% 18.8% 17.8% 17.9% 19.6% 19.1% 19.2% 19.6%

KEY MONITORABLE
 Share of CRAMS (patented) in revenue – This is the key monitorable as this is the main thesis in
Bharat Rasayan. As a part of this, one more monitorable would be if the company is able to get more
partnerships like the one with Nissan
 Share of exports in revenue
 Gross Margins – Improvement in product mix should be visible in Gross margins
 Working capital &Cash Flows
 MANAGEMENT QUALITY

1) DNA of business
Large market opportunity to serve global agro-chem customers. Company has been on the path to
take advantage of this opportunity. First step in the journey to set up Dahej plant. Cost focused driven
by running the plant at near full utilizations levels. Strong execution by the company has given the
company the opportunity to scale up its operations in CRAMS

 Cost Efficiency Focus – High

Have been able to run plants at high utilizations. Based on my interaction with the
management at the AGM this seemed to be the most important parameter for the CMD

 Production Efficiency

 Capital Efficiency/Allocation – Low

Gross Block Asset Turnover is one of the highest in the industry; however, working capital
levels are also high. When compared with Industry, Rallis and Bharat Rasayan have seen
most deterioration on debtor days.

Balance Sheet metrics FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19 A
Asset turnover 2.0 2.1 1.7 1.5 0.9 1.5 1.6 1.7 1.9 1.8 1.5
Gross Block Turnover 5.5 5.6 2.3 4.1 1.2 2.0 2.2 2.1 2.8 3.1 3.6

Balance Sheet metrics FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19 A H1 FY20
Inventory day 37 45 43 40 67 63 44 42 45 42 77 36
Debtor Days 77 61 58 72 81 56 61 66 65 100 102 107
Loans and advance days 56 32 28 22 39 26 13 15 13 7
Other working capital Days 12 9 14 6 5 4 7 1 3 6 24 8
Creditor Days (21) (35) (18) (51) (34) (35) (29) (19) (10) (16) (29) -18
Total Current liability days (39) (43) (35) (73) (82) (69) (53) (41) (21) (27) (31) -16

Gross working capital cycle 182 147 144 140 191 149 125 124 126 155 203 151
Net working capital cycle 142 103 108 68 109 80 72 82 106 128 172 136

Receivable Days FY19 FY18 FY17 FY16 FY15 FY14

Bharat Rasayan 103 102 71 71 66 61
Dhanuka 79 79 76 82 90 84
Sharda 148 191 175 185 156 185
Excel Cropcare 79 83 69 66 57 69
PI 85 84 68 69 72 59
Rallis 83 81 58 54 52 36
Insecticides 75 80 78 84 68 58

 Innovation – Low

 New Revenue Stream/ Geography – High

Exports is an opportunity – Brazil and US markets are opportunities where the management
is looking to ramp up over the next few years. Further share of CRAMS, especially from
patented molecules is expected to rise
  Value Chain Migration -High

Already explained

 Strategic Thinking – High

Dahej plant came up in FY12- with the vision to ramp up business with global agro chem
companies. Over the years have been able to ramp up capacity in this plant and also have
been able to build and nurture relationships with strategic customers- resulting in JV with
Nissan Chemicals

 Ability to manage downturns –

Post the major expansion in 2012 – there have been no major downturns for the
company/economy. Company handled the demonetization crisis in a good way by clocking a
strong 30% + growth in sales and profits.

 Walking the Talk -High

o Ability to gain share with global agro chem players; JV with Nissan Chemicals
o Strong historical financial track record in terms of sales & profit growth

2) Execution Skills
 Workforce Handling – Not sure

 Customer Trust/Win – High

Getting CRAMS business is a sign of high trust- with customers willing to give you more share
of business. The recent JV with Nissan is an indication of the same thing

 Deeper/Broader customer penetration –High

Bharat Rasayan has been working with existing customers for a long time and over time has
increased its wallet share with them. Share of revenue from top 5 customers has gone up in
the last 2-3 years.

 Successful Project – High

Based on interactions with other investors who have tracked the company – the company’s
execution on Dahej plant has been quite stellar. They were ahead of the game by setting up a
plant there and executed this without any mishaps. Just to put things in perspective, setting
up Dahej plant was a big step for the company- capex in FY12 and FY13 was ~ 120 Crores,
while revenue was around ~ 120 Crores and N/W around 55-60 Crores

3) Reputation
 Family Business – High

Not sure about the second level team. Reliance on the promoter still quite high
  Minority Shareholder Treatment - Med

Does not pay dividend- which is fair given the expansion plans of the company.

 Corp. Governance – Low

o High Related Party transactions - ~ 23% of sales to related party entities

o Promoter salary at 14% of PAT; 4-year average at 15%
o Shareholders include questionable entities- historical issue?

GROWTH/SCALABILITY

1) Linear Growth – High

 Wallet share gains with customers – Earn the fruits of the relationships developed over the last 8-
10 years with strategic customers
 Product mix improvement – replace low profit margin product with higher profitable products
 Industry tailwinds – Ability to win new customers given the increased shift of business towards
India from China

2) Expansionary Growth – High

 Patented CRAMS to increase revenue mix- Value migration towards higher quality revenue-
predictable and stable
 Exports – Looking at Brazil and US as key markets to ramp up exports. Historically company was
constrained by the cost of registrations in these markets
 New Revenue Stream – None

Business Vulnerability / Strength

1) Vulnerability
o Concentration risk – Plant (Dahej), Products, Customers
o Regulatory risk – Compliance, delay in getting regulatory approval for plants
o Weak cash flows owing to high working capital
o Volatility in crude prices – can impact profit margins and working capital
o Over dependence on Nissan JV- leading to company not being able to take other
projects/customers? – Need to dig more on this
2) Strengths/opportunities:
o Strong tailwinds in the business; large opportunity
o Has been able to win trust of customers to move up the value chain

VALUATION

Undervaluation :  Screaming  High  Fair

Fairly valued at 15x P/E with earnings growth of around 15% -18% p.a. over the next 3-4 years. If the execution
on the Nissan JV isn’t good (historical execution track record has been very good and they have been preparing
for this, so it may not actually play out) then thesis can fail

Valuations to be led by:

1) Earnings Trajectory – Conservatively speaking, earnings growth could be around 15-17% p.a. over the
next 3 years. There are couple of question on this however. Ex of Saikhya what would be the growth
 given the incremental capex at Dahej will be largely for backward integration, if my understanding is
correct. Also does the Nissan JV put any restriction on the company to win other similar business/JVs?
2) Value Migration- Business is moving higher up in the value chain from where it was 5 years back
3) Re-rating- As share of CRAMS business has a strong chance of getting re-rated

Valuation Overhang
 PSU  Not Understood  Sector Apathy  Regulatory  Political  Corp. Governance

Valuation Support
 Dividend  Low Float  Capital Allocation

 Doesn’t pay dividend

 Float is low – given promoters, promoters’ friends own close to 85-90% of the stock

Risk and Mitigations

1. Business Risks
 Supply and/or demand disruption – High
Dependence on China, though reducing, is still a risk.
 Single Point of Failure – High
Any mishap/regulatory issue on Dahej plant can impact the business materially
 Environmental – High
Delay in getting environmental approvals for new plant can delay growth. If regulations become
stringent then it can also impact economics of the business.
 Buyer Power – High
As evidenced by high working capital

 Competition – Med
Fairly competitive market on the technical side. CRAMS business has not seen many players who have
been able to ramp up this segment.

2. Valuation Risks
Risk covered in the valuation multiples  Everything  20% Downside  2-3X upside in 2-3 years

Liquidity Stress Test: Can sit tight for 1-2 years despite:
 Execution Delay  Business Temporary Issues

I have been tracking the co for only a few months, So I am not very sure what to write here

MEDIUM TERM VISIBILITY – Medium

1. Earnings -  Capex Completion.  Order Book/Sales.  Mgmt. Guidance

Dahej & Saikha Plant coming on-stream.
2. Margins –  Pricing  Raw Material Employee Costs  Product Mix
Improvement in product mix – patented CRAMS and Exports & Backward integration
3. Efficiency –  Asset Turns  Capital Turns
 INVESTMENT RATIONALE
 Strategic  2-3x in 2-3 years  10x in 10 years  Opportunistic (50-100% pop)

Sources referred:
1) VP Thread
2) AR’s, Credit Rating reports
3) AGM notes/Management Interactions
4) Discussion with other investors who have tracked the company for the last 3-4 years