Rallis India - Short term growth blip, structural story remains intact - Prabhudas Lilladher

Rallis India's (Rallis') Q4FY12 result was quite disappointing and far lower than our as well consensus estimate. Company's net sales and EBITDA de-grew by 12.1% and 59.1% YoY, respectively, during the quarter, primarily on account of adverse domestic pesticide market conditions. We believe that the short-term (6 months) outlook remains challenging due to a weak demand and inventory build-up in the industry. Further, a well distributed rainfall during the kharif season could be crucial for the sector. We believe that long-term growth prospect of the company remains intact with a presentshort-term blip. Key positives of Rallis during FY12 are strong export sales growth (up 55% YoY) and turnaround of the seeds business. We are downward revising our FY13/FY14 PAT estimate by ~15%/~13%, considering lower growth in domestic pesticide business (FY13/FY14 - 7%/15% v/s earlier 15%/15%). Further, we are downgrading our rating from 'BUY' to 'Accumulate', with a revised TP of Rs140 (15xFY13E EPS plus land value of Rs20/share).

Disappointing quarter: Rallis' consolidated net sales de-grew by 12.1% YoY to Rs2,160m (PLe: Rs2,882m). Pesticide sales (standalone net sales) de-grew by 12.0% YoY to Rs1,994m (PLe: Rs2,584m), primarily on account of de-growth in domestic pesticide business. Domestic pesticide business witnessed adverse market conditions (erratic rainfall, lower pest attack, lower demand etc.) during the quarter. Consolidated EBITDA de-grew by 59.1% YoY to Rs124m (PLe: Rs465m) with an EBITDA margin of 5.7% (down 660bps YoY and PLe: 16.1%). Sluggish demand, farmer preference towards low value products and higher inventory resulted in margin pressures. Consolidated PAT de-grew by 95.4% YoY to Rs8m (PLe: Rs240m). Company has an exchange gain of Rs44m and reversal of cessation cost (Turbhe plant) of Rs70.5m (net of tax Rs47.2) during Q4FY12. Hence, reported PAT stood at Rs99m.

What we expect in FY13

We are expecting 7% (earlier 15%) growth in the domestic pesticide business (expected market growth of 4-5%). We are expecting 25% growth in the export business supported by the Dahej facility. We are considering 120bps jump in consolidated EBITDA margin on account of improvement in margins of the seed business (led to 40bps jump in consolidated EBITDA margin) and marginal improvement in the pesticide business considering normal business environment. We believe that gross debt is expected to lower by Rs500m during FY13 that led to lower interest outgo by Rs43m.

Outlook and View

We believe that short-term (6 months) outlook for the industry remains challenging and monsoon will be a crucial event in the near term. However, we strongly believe that long-term growth prospects of the company as well as the industry remain intact. We remain 'Positive' on Rallis' business model and its growth prospects. We are revising our PAT FY13/FY14 estimate by ~15%/~13% considering lower growth in domestic pesticide business (FY13/FY14 - 7%/15% v/s earlier 15%/15%). Further, we are downgrading our rating from 'BUY' to 'Accumulate' with the revised TP of Rs140 (15xFY13E EPS plus land value of Rs20/share).

Source : Equity Bulls

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