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Adding Rynaxypyr ahead of time in the kitty

* UPL has announced a long-term strategic collaboration with FMC Corporation. It will toll manufacture and supply Rynaxypyr to FMC in India. FMC will supply the active ingredient (AI) to UPL depending on the market. We have analyzed the market size, use of Rynaxypyr, and impact of the agreement on UPL.

UPL announces a long-term collaboration with FMC for Rynaxypyr

* UPL has announced a long-term strategic collaboration with FMC Corporation, a leading global agricultural sciences company.

* The pact allows UPL access to key markets prior to the patent expiry and to commercialize Rynaxypyr Active: FMC's leading insecticide.

* As per the agreement, UPL will toll manufacture and supply Rynaxypyr to FMC in India. FMC will supply the AI to UPL depending on the market.

* The deal adds a key portfolio of products to UPL's business and supports FMC in maximizing the penetration of this important AI.

* Early access to Rynaxypyr formulations in key markets allows UPL to provide farmers with more sustainable product choices.

Rynaxypyr accounts for 2.7% of the global Crop Protection market

* Rynaxypyr AI was first registered in the Philippines in Jun’07 and in 19 countries in CY08, including the US, Canada, and Australia. Since then, its approved uses have expanded to over 120 countries. In doing so, it has passed rigorous regulatory reviews over the past decade. A major regulatory reassessment is slated to occur in the EU, US, Canada, and Japan within the next few years.

* The molecule was launched in CY07 by DuPont. It had to divest this product when it merged with Dow Chemicals due to regulatory issues. FMC acquired the AI from DuPont in CY17 and launched the same in CY18.

* Rynaxypyr AI is a scientific breakthrough that has become an important tool for growers around the world to protect their crops from harmful insects. The essence of this breakthrough – what scientists call a ‘novel mode of action’ – is Rynaxypyr AI’s highly selective targeting of these insects. The AI attacks the ryanodine receptor in the insect.

* About 30% of Rynaxypyr produced is used by the rice industry. Fruits and vegetables/soybean applications account for 22%/24% of consumption volumes.

* In CY19, the global Rynaxypyr market was valued at USD1.6b (v/s the global Crop Protection market of USD59.8b). The market is expected to expand at a moderate CAGR (4.4%) over CY18-25 and reach USD2.1b by CY25-end.

* Industry sources peg the Rynaxypyr India opportunity at over INR20b (B2C). The market size for manufacturing the AI in India for UPL is INR7-8b (market size for technical is 35-40% of the B2C market of INR20b).

* Composition of matter patents (product patent) for Rynaxypyr is going to expire globally (Europe, US, Brazil, India, and China) over Aug’22 to Apr’23. Process patents too would expire over Dec’25 to Apr’26 (Refer Exhibit: 5-8).

* UPL will launch the formulation with its own trademark in India as well as overseas. It will roll out the combination molecule in key markets globally prior to the patent expiry, which will provide it with a huge opportunity.

Valuation and view

* The pact with FMC will allow UPL to launch Rynaxypyr formulations with its own trademark and combination molecule in key markets, thereby enabling the company to add a new core molecule to its portfolio. Rynaxypyr has a 2.7% market share in the global Crop Protection market. As per an industry source, toll manufacturing and supply of Rynaxypyr to FMC in India will provide UPL with a INR7-8b – a long-term growth opportunity.

* In its 2QFY21 conference call, the management guided at reducing debt by USD700m in 2HFY21. Of this, USD410m of debt has been repaid as on 28th Dec'20. The debt repayment was from its cash balance of INR80b as of Sep'20 as CFO from 1HFY21 was a mere INR1.4b. The cash balance is aided by issuance of USD denominated senior notes of USD500m in Jun'20.

* The company has to repay loans worth USD290m (INR21.2b, assuming a USD:INR conversion rate of 73) by the end of FY21.

* It has a current cash balance of INR35.9b as of Dec'20. Cash generation in 4Q would be critical for debt repayment (in 9MFY21, it generated CFO of INR5.5b).

* Debt repayment and cash generation would be a key trigger to watch out for going forward.

* The stock has traded at an average P/E of 13.5x over the last three years on a one-year forward basis. We have ascribed 11x P/E (~20% discount to its threeyear average) as high debt is a key concern for the company.

* We maintain our Neutral view with a TP of INR631/share.

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