Insecticides India Bets Big on New Molecules

Rajesh Aggarwal is used to taking calls others would normally avoid, and then pulling them off. More than a decade ago, his father and he opted out of a family business of agrochemicals, selling their stake to his uncles for a paltry sum. They started anew and built a business, Insecticides India Limited (IIL), which is set to cross Rs 800 crore in revenues this year, and is among the fastest growing firms in the sector.

In September, Aggarwal took another step that few Indian agro companies would dare to: He formed a joint venture with Japan’s Otsuka AgriTechno to set up a research and development centre in Rajasthan to create molecules which will lead to new insecticide and herbicide products.

“My vision is to bring the latest products to Indian farmers who are becoming more aware and are willing to pay for good stuff. Of the 950 agrochemical products available globally, only 250 are sold in India,” says Aggarwal, managing director of IIL. The joint venture plans to invest Rs 500 crore in the next five years and come up with “three to five new molecules”.

It is a brave investment for anyone in the Indian agrochemical industry, which, like its pharmaceutical peers, mostly focusses on manufacturing generic products. Some of the biggest Indian companies in this sector, including Tata Group’s Rallis India that has its own R&D arm, prefer to ink marketing and manufacturing tie-ups with multinationals.

Earlier this year, Rallis opened a new facility that aims to specialise in contract research and manufacturing for its clients. Another industry major, United Phosphorus, opted to expand its business globally through acquisitions.

The reluctance to invest in ‘pure’ R&D is understandable. “Developing a new molecule is highly risky as it needs both time and money. Chances of failure are high and sometimes an investment of Rs 1,000 crore is needed to develop a single molecule,” says Satish Kantheti, joint managing director, Zen Securities, a financial services company that closely tracks this sector.

Meanwhile, Aggarwal knows that the $2 billion Indian agrochemical industry—it is the fourth largest in the world—is ultra-competitive, especially at the top. The 10 largest companies control nearly 80 percent of the market.

“If smaller companies want to survive, they have no option but to collaborate and get into R&D. Or else they will face the heat and turn to trading,” warns Rajiv Chaturvedi, chief scientist at Tata Chemicals’ Innovation Centre.  

Aggarwal says, “I have noticed many companies in the sector struggling to grow after reaching Rs 1,000 crore in turnover; they also have low margins. I want to prevent that.” It is a lesson that he has learnt in the last 10 years.
 
THE KEY: BRANDING AND NEW GENERATION PRODUCTS
The father-son duo organised their first dealer meet in 2002 after setting up IIL, and were taken aback when only a few of their known dealers turned up. “I realised I couldn’t bank on dealer network alone. I needed to have good products to ensure brand loyalty in farmers,” says Aggarwal.

As an initial step, he leased three brands from Ranbaxy’s unit Montari Industries, eventually buying out 21 brands from the legendary Bhai Mohan Singh’s company.

Over the years, even as he expanded his dealer and distributor network, Aggarwal went on building his product portfolio. He tied up with Japan’s Nissan and America’s AMVAC to bring in specialised products to the domestic market.

“We have three product ranges—platinum, gold and silver. While net margins in platinum are almost 15 to 17 percent, those in silver are below 5 percent,” says Sandeep Aggarwal, CFO of IIL. In the last four years, the share of platinum products in the portfolio has increased to 65 percent from its earlier 35 percent.

Aggarwal simultaneously built an R&D centre next to his first manufacturing facility on the outskirts of Delhi.

“I have been with Rajesh for over 20 years now. Very early on he realised the importance of R&D. We have been able to cut production time of many molecules to half [often called process R&D in industry parlance]. The R&D centre has also developed and commercialised insecticide and herbicide products,” says Mukesh Kumar, head of the 20-member R&D team at IIL.

Aggarwal is also improving his company’s self-sufficiency in making active ingredients or chemicals that are used to make crop protection products. From 25 percent this year, IIL will be producing about 45 percent of its requirement of active ingredients by next year.

Aggarwal’s rapid rise has brought him to the notice of his competitors. Jagganath Kale, one of his distributors, narrates how IIL’s insecticide Victor has eaten into the market shares of bigger multinational companies like Bayer and Syngenta in Maharashtra. “Now they talk about IIL in Syngenta’s meetings,” says Kale.

But none of these initiatives were unique to Aggarwal’s IIL and the entrepreneur realised that he needed to do something different to ensure his company grows. “Many companies have diversified into contract manufacturing. We too are scaling up our plant capacities in Gujarat and Jammu,” he says.

Though contract manufacturing assures a steady cash flow, the presence of bigger companies and intense competition limits its scale. But if one has access to products that are developed in-house, it not only gives an upper hand against competitors, but also assures higher margins.

R&D: THE LONGTERM SOLUTION
Global biggies like Syngenta and Bayer (the largest listed agrochemicals player in India) spend a billion dollars annually in researching and developing new products. Among Indian players, Rallis is the only one to have consistently focussed on developing new molecules. But going by the present market buzz, the company might reduce its R&D expenditure in favour of contract research.

While Aggarwal is wise enough to understand the fallacy in trying to match up to the capability of his much bigger peers, he has found a silver lining. “Many of these big players don’t introduce latest products in the Indian market, but choose to squeeze as much as possible out of second generation products. This is an opportunity that I can tap into,” he says.

A budget of Rs 500 crore may not be enough to make full use of this opportunity. And this is where the deal with Otsuka, which is also the majority shareholder in the venture, is novel.

The Japanese company, which was hived off from its parent Otsuka Chemical in 2010, has developed and manufactured insecticides that are now sold in 60 countries. In the company’s R&D lab in Japan, many new ‘leads’, or ideas from which molecules are derived, are being developed.

“A few of these workable leads, which can sometimes take up almost 10 years to develop, will be brought to the R&D centre in Rajasthan; we will develop molecules, possible products and later conduct trials and do pilot projects in India,” says Aggarwal. His company will also provide infrastructure and market access in the joint venture.

Otsuka’s board member Tetsuya Imai, in his interaction with the media in early October said that the new R&D centre, which will start operations in April 2013, aims to invent five new molecules in the next five years.

It is a major initiative for the Japanese company which, for the first time, is setting up an R&D centre outside its home country and intends to get a slice of the fast-growing Indian agrochemical market. There’s huge potential as the per capita consumption of pesticides in India is 500 gm compared to 6 kg in Japan.

Industry watchers like Kantheti of Zen Securities warn about the financial burden that the new initiative will bring on IIL, especially with Aggarwal spending Rs 100 crore in the next two years to expand manufacturing capacities. But Aggarwal is confident that his bet will pay off.

“New products give almost 20 percent of net margins. And Indian farmers are becoming more aware; they are more willing to pay if they see their crop improving.”