Macro headwinds buffet Rallis' Q3 earnings

The factors that impacted domestic and international demand may continue; growth expected to resume in Q1-FY16

Rallis saw a soft December quarter with demand getting impacted both in the domestic as-well-as international arena simultaneously. Added to this were losses of Rs 4 crore at its hybrid seed making subsidiary Metahelix. The company’s numbers came much lower than Street expectations and the stock corrected 5.5% to close at Rs 214.15 on Wednesday.

While the markets had expected Rs 444.2 crore in revenues, Rs 64 crore in EBIDTA and Rs 35 crore net profits, as per Bloomberg consensus, the company only managed Rs 389.47 crore in revenue, down 2.8% annually, a 16% lower EBITDA of Rs 50.46 crore and profit of Rs 25.49 crore, also a 16% drop from the previous year. 

The miss, however, has been due to headwinds on the macro front. According to senior company executives, the crop shift in Bihar from maize to wheat, reduced farmer sentiment due to lower kharif yields, and lower prices of key crops dented the performance. 

Deficient monsoon in north east, lower crop acreage in Andhra Pradesh Gujarat and Maharashtra also impacted the results, managing director and chief executive officer V Shankar said. 

In the international market, Brazilian demand suffered due to carried forward inventory, lower corn acreage and adverse currency movements. The quarter, usually soft for Metahelix, was hit for these reasons, as well as because fixed costs remained firm, leading to Rallis bearing the brunt at the consolidated level.

The headwinds seen in the third quarter may be repeated in the final quarter of FY-15, meaning that growth may regain momentum only in the first quarter of the next fiscal, traditionally the strongest quarter for the company. 

From a strategy perspective, the company has been moving from a 90:10 pesticide to seed ratio until a few years ago to a 60:40 balance. The seed portfolio is likely to cross 30% mark in FY15. It has also launched two new insecticides Origin and Hunk, while the agrochemical division has released new maize and hybrid paddy seeds that have been well received. The contract manufacturing business is likely to contribute better in FY-15. 

Sarabjit Kaur Nangra of Angel Broking said that the quarter was affected by macro headwinds and there is not much need to read too much into it. Analysts at Ambit remain bullish on the stock, with 12-month forward discounted cash flow-based target price of Rs260, implying 18x of FY-16 EPS. However Sarabjit feels that the valuations are stretched and has a neutral rating on the stock. Consensus target price for the stock stands at Rs 235 as per a January poll of analysts by Bloomberg.