Muted quarter turns Street cautious on Rallis

Timely onset and good monsoon are key to driving earnings upgrades

Rallis India’s FY17 performance would have been even better, but for the muted show in the quarter ending March 2017. While better rainfall in 2016 compared to the previous two years had lifted Rallis’ performance in the first nine months of FY17, the March quarter’s performance was impacted due to the Northeast monsoon coming below normal, leading to paddy acreage declining 12%.

During the March quarter, Rallis’ standalone revenue (Rs 346 crore) was flat year-on-year (y-o-y), operating profit grew just two% while rising depreciation costs pulled down net profit by two% to Rs 32 crore. The impact was more pronounced for Metahelix, the company’s hybrid seed subsidiary, at the operating level — which pulled down Rallis’ consolidated numbers. Consolidated operating profit at Rs 41.6 crore declined about eight% y-o-y; net profit fell by about 10% y-o-y.

With lower-than-expected performance, the stock lost 4.43% and closed at Rs 239.55 on Tuesday. The stock has already seen a strong run-up in the past 14 months helped by a good monsoon in 2016, which helped Rallis’ net profit almost double to Rs 297 crore in FY17. For further upsides, the growth momentum needs to continue.

While Metahelix has seen a weak March quarter, it is still seen as a good profitability driver. Notably, except for the March quarter, Metahelix sales had been ramping up quite well (up 19% in FY17) and its margins have also improved by 500 basis points to 9.6% in FY17. With the management targeting 14% margins, profitability should improve further.

Contract manufacturing and exports, which reflect in Rallis’ standalone numbers, should also see improvement. V Shankar, managing director and CEO, Rallis lndia, said capex of about Rs 40-50 crore has been allocated looking at new commercial contracts for which supplies will start soon. In the domestic markets, Rallis has launched a fungicide, an insecticide and a seed treatment solution, and more products are lined up for FY18. Brands such as Ergon, Summit, Mark, Epic, etc launched earlier have registered good growth in FY17 and will be key drivers of growth going forward. 

Though general expectations are that the monsoon may be around normal levels, all eyes will now be on the onset of the rains from May-end. Timely onset of monsoon and even distribution will be necessary as placement of seeds has started and off-take will catch pace as the monsoon strikes. 

Nonetheless, even if earnings grow as anticipated, the stock is already trading at rich valuations of 19-20x of FY19 estimates. Analysts at Ambit Capital say disappointment in the March quarter should drive a three-four% cut in the Street’s earnings estimates for the company. In short, near-term upsides appear limited.