Multiple headwinds for Rallis India

Adverse weather conditions in domestic and foreign markets could impact firm's performance for 2 qtrs

A deficient monsoon in India and a drought in Brazil, two key markets for Rallis India, and muted growth prospects saw the company’s stock fall to its two-year low recently. Although most other agri-chemical stocks have been on a declining trend since the September 2015 quarter results, Rallis has been one of the most impacted, shedding about a third of its market cap. The company’s September 2015 quarter results were below estimates with revenues, operating profit and net profit missing projections by 20-27 per cent.

While the stock has been downgraded by analysts, it continues to be under pressure given multiple headwinds. The India market, which accounts for around 70 per cent of its revenues, has been pegged back over the past year owing to deficient monsoons and a lack of new product launches in FY13 and FY14. Between FY10 and FY14, the company’s net sales grew upwards of 15 per cent, but came down four per cent in 2014-15.

While the domestic market saw muted performance, falling sales in the key markets of Brazil and US have been responsible for the poor bottom line show over the past two quarters. In addition to competitive pressures, which have increased, declining crop acreage in Brazil and the US as well as the launch of certain insect-resistant genetically-modified seeds impacting the sale of insecticides are also hurting the company. Given 12 per cent of the sales are in the US and Latin America, analysts at Bank of America Merrill Lynch say there is unlikely to be a very dramatic recovery in the second half of FY16. In addition to the above, the brokerage is negative on the company due to its weaker presence in the fast-growing Indian herbicide market and slow ramp-up in contract research and manufacturing business. Going ahead, analysts say the launch of new products recently is expected to improve growth in the domestic market.

After the sharp correction, the stock is trading at 17 times its FY17 estimates, and largely factors in the near-term challenges. While this is lower than the six-year price-to-equity ratio average of about 20 times, the lack of immediate triggers and multiple headwinds will keep the stock under check. That said, the long-term prospects of the agro chem space as well as Rallis given the new product launches. Hence, those with patience can consider the stock on corrections.