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

Our analysis of Rallis India's (Rallis) annual report shows that FY12 was a challenging year for the domestic pesticide industry on account of adverse weather conditions. At the sametime, it was one of the strongest growth year for the global pesticide industry. Domestic industry is estimated to have declined in FY12 and in line with the same, Rallis' domestic pesticide sales have shown de-growth (~2% YoY) in FY12. Export sales grew by 48% YoY on the back of healthy growth in global industry as well as rupee depreciation. We believe that Rallis' conscious measures like discontinuation of red triangle products, focus on cash collection etc. had affected the performance of it's domestic business. Including sales from red triangle products, Rallis has grown faster than industry, which we believe is a strong performance despite a tough year. We believe that short-term (three month) 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 would remain intact.

- Adverse climatic condition affected domestic business: Indian pesticide industry is estimated to have declined in FY12 on account of adverse weather conditions, primarily in the second half. Cotton and paddy sowing were impacted (~60% of Indian Pesticide Industry) on account of a delay in the Kharif season which resulted in a change in usage pattern of pesticide molecules. Industry had seen low pest and disease occurrence in key crops during the Rabi season. In-line with the domestic industry, Rallis' domestic sales de-grew (~2% YoY) during FY12. On a conscious note, Rallis has completely discontinued sales of red triangle (extremely toxic) products which had in the past contributed to 10% of revenue (6-8% of consolidated revenue). Company formulation business registered growth of 2% YoY driven by sustained performance of key brands. We believe that Rallis' institutional business has shown de-growth (no growth % mentioned in annual report).

- Launched ten new products: Company has launched 10 pesticide products during FY12 across the category i.e. Insecticide (3 products), Herbicide (4 Products) and Fungicides (3 Products). Further, company has registered sixteen and four products in the international and domestic market, respectively. Rallis' Turnover Innovation Index (sales of product launched during the past four years) stood at 11% during FY12 (v/s 20-30% in the past seven years). We believe that company's key revenue generating products 'Applaud' and 'Takumi' have come out of the index. Hence, index has fallen down substantially (including revenue from both the products ,turnover innovation index stood at 20%). Company believes that new generation products like Ergon and Saras, plant growth nutrient products like Tata Bahar and Ralligold, Herbicide like Tata Vaar and Honcho will drive the growth in the future.

- International business shows robust growth led by healthy industry growth and rupee depreciation: Global pesticide industry grew by 17% YoY to US$44.92bn led by significant improvement in crop commodity prices resulting in higher demand and realisation. Rallis' international business grew by 48% YoY led by strong volume growth supported by rupee depreciation. We believe that export sales have also been supported by the newly commissioned Dahej facility.

- Metahelix broke even in FY12 as guided at the time of acquisition i.e. Dec 2010: Rallis has increased its stake in seed venture Metahelix Life Science from 60.21% in FY11 to 75.64% in FY12. 'Metahelix' has seen net sales of Rs930m during FY12 (v/s Rs424m in FY11) with marginal PAT (v/s loss of Rs149.3m in FY11). Metahelix has launched ten new seed hybrids in its portfolio and extensive field activities were conducted to establish these new products.

- Higher raw material cost impacted the standalone EBITDA: Company's standalone gross profit dipped by 110bps YoY to 40% in FY12 on account of higher raw material cost. Rallis' overall employee strength decreased from 918 to 857 in FY12 primarily due to VRS given to non-management staff at Turbhe plant on cessation of manufacturing operation. We believe that company is likely to save cost due to cessation of Turbhe plant in the near term and we as well as markets are not factoring the savings in estimates. Hence, it could be an upside trigger to earnings estimate, going forward. Standalone EBITDA declined by 30bps YoY to 17.5%. We believe that Rallis' EBITDA has shown a marginal decline despite tough market conditions because the industry has given higher discount/margins to dealers to push the products and focus on cash collection.

- We expect improvement in FY13: We are expecting 7% growth in the domestic pesticide business (expected market growth of 4-5%). We have considered lower than long term industry growth (i.e. 10-12%) because industry is witnessing inventory built-up at distributor level. Hence, we believe that inventory would get liquidated in H1FY13 that would result in lower growth during FY13. We are expecting 25% growth in the export business supported by the Dahej facility. We are considering 70bps jump in consolidated EBITDA margin on account of improvement in margins of the seed business. We have not considered any improvement in pesticide business EBITDA margin. Hence, it could positively surprise, going forward. We believe that gross debt is expected to decline by Rs500m during FY13 that led to lower interest outgo by Rs43m.

- Outlook and View: We believe that short-term (3 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 maintain our 'Accumulate' rating on the stock with the TP of Rs140 (15xFY13E EPS plus land value of Rs20/share).

Source : Equity Bulls

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