Rallis India - Nurturing the roots - Elara Capital

Seed business to play pivotal role going forward

The seeds business of Rallis is taking the desired shape post the acquisition of Metahelix. Over FY13-15, we expect Metahelix to almost double its revenues from INR1.3bn to INR2.7bn. EBITDA margin would expand from 5.6% in FY13 to 11.4% in FY14 and 14.3% in FY15 on the back of operating leverage. The focus on R&D with strong breeding programs in rice, corn, cotton, pearl millet will help the company to strengthen its product portfolio. Shift in the cropping pattern in favour of corn and focus on under penetrated hybrid Paddy (currently ~5% Hybridisation) and hybrid vegetable seed will keep the business on higher growth trajectory.

New launches & herbicides to boost the domestic business

New product launches over FY11-13 is skewed towards herbicides (5 herbicides viz-a-viz 4 insecticides) and it indicates the strategic shift to grab the impending opportunity in herbicides. Rise in wages of farm labour made weed-pulling costlier and thereby use of herbicides has become a more economical, leading to rapid growth in herbicides consumption. The Domestic business of Rallis is likely to register a 12% CAGR driven by a ~11% CAGR in formulations business over FY13-15 aided by 1) Strong branded product portfolio, 2) Rallis' brand strength 3) continuous launches of innovative products, 4) strong distribution network, 5)Farmer connect activities like RKK, 5) strong alliances/tieups with MNCs to market/distribute their products.

Rising generic pesticides demand to boost International business

The company is well placed with capacity expansion at Dahej facilities to grab the upcoming demand due to patent expiry of molecules and rising demand for generic pesticides in global market. The products worth USD 4bn are expected to go off-patent in next couple of years. Over FY13-15, the international business of Rallis is likely to grow at a CAGR of 23.5% viz-a-viz likely export growth at CAGR of 10%.

Valuation

We initiate coverage on Rallis with a Buy rating and a TP of INR187 based on weighted average of P/E of 17x to FY15 EPS and EV/EBITDA of 12x to FY15. We strongly believe Rallis is slated for a rerating over the next couple of years owing to - 1) strong 32.4% CAGR in earnings over FY13-15, 2) high return ratios in range of ~25-30%, 3) best working capital management amongst its peers 4) healthy free cash flow generation of INR 2.2bn over FY14-15E and 5) lower dependence on domestic pesticide business added by increasing pie of international business and scaling up of seeds business.

Source : Equity Bulls

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