Cost inflation, pricing action key for agri input major Rallis India

The company posted losses at the operating level in Q4FY22

The stock of agri input major Rallis India was down 9.7 per cent in trade on Friday, after the company reported weak March quarter (Q4FY22) results. It has fallen another 4 per cent since then. A sluggish performance in the international segment and margin pressure led to the underwhelming results.

The company’s 7.7 per cent growth in consolidated revenues was a function of domestic growth. Sales in India was up 25 per cent YoY to Rs 294 crore; this geography accounted for 58 per cent of sales. Robust sales were led by 13 per cent growth in realisations and a 12 per cent rise in volumes. 

Lack of raw material availability in a key molecule (a supply-side disruption in herbicide pendimethalin) and higher inventories in herbicide metribuzin affected the performance. The revenue from the international market declined 8 per cent YoY to Rs 213 crore. The company has been diversifying its sourcing requirements away from the Chinese market. In addition to resolving its sourcing issue, what may drive growth is launch of new products; the company launched 19 products in FY22. 

Despite the price hikes, the company was unable to offset the sharp rise in costs. Overall gross margin was down 663 basis points YoY to 34.8 per cent, which, coupled with the inability to pass on high costs and an inventory write-off in the seeds business, led to losses at the operating profit level. The company thus reported an operating loss of Rs 2.8 crore as compared to a profit of Rs 17.7 crore in the year-ago quarter. The company may have to undertake more hikes to remain profitable. 

Himanshu Binani of Prabhudas Lilladher India says: “Going forward, we believe headwinds related to supply chain and availability of certain intermediates will likely continue in the subsequent quarter. Though Rallis took price hikes in the recent past, it was, however, not sufficient to mitigate entire cost inflation, hence more such hikes are possible in the near term, too.”

In addition to easing pricing pressures, backward integration of a few inputs and an increase in custom synthesis/contract manufacturing business revenue will be among the drivers for the stock, according to ICICI Securities. 

At the current price, the stock is trading at 21.6 times its FY23 earnings estimate. Investors should await the progress on volume and margin performance before considering the stock.