Reduce Rallis India - Dolat Capital

Rallis Q4FY12 results are disappointing. Deceleration in domestic business impacts profitability. Opts for tighter control on receivables.

Rallis India's topline for the quarter declined by 12.1% YoY to Rs.2.16bn, reflecting the slowdown in domestic business. Factors such as poor acreages, preference towards low-value molecules and high inventory in the market have together affected its performance. The management has opted for tighter control on receivables than chasing sales growth in an unfavourable market environment.

Paddy and cotton, key crops for Rallis, continue to witness low pest incidence. This is one of the reasons its Innovation Turnover Index has slipped lower to 11.4% (against historic average of +20%). Arguably, Applaud and Takumi – two flagship brands have not been considered during the period.

Dahej facility (two blocks) is running at its optimum capacity. Consequently, exports (own registered products) have reported healthy growth and account for one-third of the business.

Consolidated EBITDA margins declined by 660bps YoY to 5.7% mainly on account of increase in other expenses and employee costs. Raw material costs inched up 40bps YoY at 58% of sales. Metahelix recorded loss of Rs.8mn at EBITDA level.

Interest costs increased to Rs.28mn (up 16.9% YoY). Depreciation also jumped by 68.8% YoY to Rs.87mn with further capitalization of the Dahej facility.

Exceptional items include a) gain of Rs.71mn on reversal of cessation cost towards discontinuation of operations at Turbhe facility and b) forex gain of Rs.44mn.

The company reported a net loss of Rs.16mn (excl. exceptional items), down from Rs.166mn profit in Q4FY11. Metahelix recorded a net loss of Rs.19mn.

Rallis has acquired 51% stake in Zero Waste Agro Organics Pvt. Ltd. (organic manure and soil conditioners.) through an all-cash deal of Rs.290mn. This business is expected to reach revenue of Rs.1bn over the next five years.

We have lowered our FY13E/FY14E earnings estimate by 14%/10.5% respectively to factor in for slowdown in domestic business and shrinkage in operating margins.

Likely upward revision of MSPs and a favourable Kharif season stands crucial for a turnaround in domestic agrochem industry. Scale-up in revenues from its seeds business (Metahelix) and Dahej facility are key growth drivers.

Valuation

We expect revenue growth from domestic market to moderate in the near term. Increased cultivation costs and low pest incidence has led to deceleration in volume off-take.

The upcoming Kharif season shall be an important determinant for future growth in domestic agro business. Scale-up in Metahelix business and increased contribution from exports in the interim are growth drivers.

At CMP, the stock trades at 16.1x FY13E and 12.8x FY14E earnings. We believe there is limited upside from these levels and recommend Reduce on the stock, with revised target price of Rs.123 (13x FY14E EPS).

Source : Equity Bulls

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