AGRI INPUTS Plough Plant and Grow Gauri Anand

AGRI INPUTS Plough, Plant and Grow Gauri Anand December 2015

Agriculture value chain INR Bn US$ Bn 120 2. 0 Fertilisers 1300 21. 7 Pesticides 100 1. 8 0. 1 CRAMs an emerging opportunity 60 1. 0 0. 1 Micro, drip/ sprinkler irrigation 300 5. 0 0. 3 Seeds Irrigation equiments Tractors, Tillers % of GDP 0. 1 ~ 25% is organised, rest is saved seeds of last year 1. 4 overall ~ 55 mmt of which urea is 30 mmt India ranks among the top countries in sheer volumes; however India lags in efficiency India yields are the lowest and well below the world average With ~ 50% of the population involved in farming and allied activities, agri and allied activities forms only ~ 15% to overall GDP

India's Position in World Agriculture Item India World % Share 's Rank Next to Area (mn hectares) Total Area 329 13442 2. 4 Seventh Russian Federation, Canada, U. S. A. , Land Area 297 13009 2. 3 Seventh Russian Federation, Canada, U. S. A. , 159 1411 11. 3 Second USA Population in mn Total Population 1181 6750 17. 5 Second China 583 2617 22. 3 Second China Total Cereals 267 2521 10. 6 Third Total Pulses 15 61 24. 6 First (A) : Vegetables & Melons 90 932 9. 7 Second China (B) : Fruits excluding Melons 67 580 11. 6 Second China (A) : Sugarcane 348 1736 20. 1 Second Brazil (B) : Tea 0. 81 3. 9 20. 7 Third (C) : Cotton(lint) 3. 77 22. 85 16. 5 Second Agriculture Crop Production (mmt) China, USA Fruits & Vegetables (mmt) Commercial Crops (mmt) China, Turkey China

Poor Monsoons, is it still an area of concern? Despite deviation in monsoons (compared to lpa), most factors have growing, underpinning the resilience Net irrigated area has been on the rise

Declining per capita land availability (halved to 2. 2 ha land person) has put the onus of increasing food production on existing farm land Declining per capita land availability Projected demand of food in India’s population by 2050 (in bn)

Dietary shifts - India needs to produce more also to feed the livestock Consumption (mmt) FY 12 CAGR 2007 -12 104. 32 2. 2 Wheat 93. 9 4. 4 Cotton (mn bales) 35. 2 9. 2 Meat* 4. 10 15. 8 Egg* 0. 65 6. 5 Fruits* 0. 08 6. 2 Vegetables* 0. 14 11. 1 Rice

Yields have to improve, farm inputs to aid growth Between 2005 and 2009, profitability of farmers improved significantly on the back of rise in MSPs and largely stagnant input costs. Major part of the costs (~85 - 90%) include labour, land (rent) and inputs such as fertiliser and agro chemicals Post the 2005 – 2009 period, farmer profitability took a hit on account of increase in labour costs (>50% of cost of cultivation), increase in fertiliser costs (post NBS) and relatively stable MSPs On an average, paddy farmers in AP saw net income decline from ~Rs. 2, 700 / acre (2009) to a loss of Rs. 2, 320 per acre in 2011 NREGA program is considered to be a key driver for increase in farm labour cost as it reduced availability of labour, increased the base cost of labour especially during the important sowing and harvesting period Yield/ha - India vs. World 000 Kgs/ha Paddy Wheat Maize Groundnut Sugarcane India 3. 37 2. 80 2. 32 1. 07 68. 88 World 4. 31 3. 09 5. 11 1. 55 71. 51 % -21. 8 -9. 2 -54. 5 -31. 0 -3. 7

Rise in input costs has led to stagnating profits Cost components, agriculture is labor centric Profits stagnate: Rice cultivation in AP (Rs/ha) Cotton cultivation (high grade) in AP (Rs/ha)

Small ownership, falling farm profits and rising land prices to result in consolidation Category of Holdings __Number of Holdings (PPL in mns)__ ______Area (mn hectares) _______ ___Avg Size of Holdings (hectares)___ 2000 -01 2005 -06 1 2 3 4 5 6 7 Marginal (< 1 hect) 75 84 30 32 0. 4 0. 38 (62. 3) (64. 8) (18. 7) (20. 2) 23 24 32 33 1. 42 1. 38 (19. 0) (18. 5) (20. 2) (20. 9) 14 14 38 38 2. 72 2. 68 (11. 8) (10. 9) (24. 0. ) (23. 9) 7 6 38 37 5. 81 5. 74 (5. 5) (4. 5) (24. 0) (23. 1) 1 1 21 19 17. 12 17. 08 (1. 0) (0. 8) (13. 2) (11. 8) All Holdings 120 129 158 1. 33 1. 23 Small (1 to 2 hect) Semi-Medi (2 to 4 hect) Medium (4 to 10 hect) Large (>10. 0 hect)

Contract manufacturing – Agri input industry could be large aggregators of farm produce for modern retail More than a tenth of the produce is APMC mandis are located far from farmers implies only 35% of the produce is sold at MSP lost due to poor infrastructure Sq km 115 823 940 1465 7096 435 80 % Potato 11 Onion 11 Other vegetables 13 Fruits 19 Food grains and oilseeds 10 Average 12 15 2. 5 77. 5 100 Cu ice st om er ar p r gin er r m ile ta Re w ho le s al le sa b le Su ho Ci ty or sp an Tr w w as ta ric t a m nd an di p co Ex r ge e s st s nd xe Ta Farmer realizes only 68% of the customer price s a th iya s ca th Pu c ar ha tc ar iya er rm Fa 6. 8 1. 7 1 68 Ku Punjab Rajasthan Uttaranchal Himachal Pradesh Sikkim Average Benchmark Implied radius (km) 6 16 17 22 48 12 5 Although FCI has upped procurement it’s a meager 35% -

Seeds: sow for high returns Rank Country 1 2 3 4 5 6 7 8 9 10 11 12 Area (mn hectares) 69. 0 30. 3 23. 7 10. 6 10. 4 3. 9 2. 8 2. 6 2. 3 1. 3 0. 9 0. 7 Value Biotech Crops (US$ bn) 12 2 0. 6 2 0. 55 9. 5 NA NA 0. 37 NA NA 0. 4 Maize, soybean, cotton, canola, sugarbeet, alfalfa, papaya, squash Soybean, maize, cotton Cotton Canola, maize, soybean, sugarbeet Cotton, papaya, poplaar, tomato, sweet pepper Soybean Cotton Maize, soybean, cotton Soybean, maize Soybean Cotton, canola Rise in yield & production of cotton after application of BT cotton

Seed pie Crop share in volume terms Crop share in value terms

Rice the next big hybrid opportunity Rice yields though up 18% in the last decade, yields are stagnating over the last 5 years Seed replacement rate though improved it is still very low in cereals

Pesticides: Low gramage to drive growth MSP of rice and cotton on a rise, thus improving pesticide affordability Extent of crop losses(%) with and without crop protection Total agrochem market $ bn

Outlook for generics continues to look good $6 bn worth products going off-patent in 5 years Share of generics rising Average cost of a new product introduction is up ~ 70% in a decade No. of new AI's is falling every year (inventors) 16 14 12 10 8 6 4 2 0 1980 1995 2000 2002 2004 2006 2008 2010

Monsanto India The seed business is secular barring the setbacks over the last three seasons. Subdued MSP hikes and inadequate monsoons have led to lower corn plantings; weak glyphosate prices have further pressured earnings in FY 15 -16. However, Monsanto’s sustainable competitive advantage is derived from its technological superiority and market reach, making it a promising long-term investment opportunity. Maize hybrid seed industry is set to compound 20% by FY 18, Monsanto (leader with 26% share) guides of superior product launches which would help better industry growth (estimate EPS to compound 28% during FY 16 -18 E). It’s an innovation led company steered by high rate management; with attractive dividend payout ~80%, yield 2%. Any approval for GM corn would be viewed as a significant positive (final leg of data submission). At CMP, doesn’t consider any option value for GM maize (a min Rs 2000/sh opportunity).