Q3 performance: Margin disappointment for Rallis India, shares tank over 7%

With recent price hikes, margins should recover

A strong volume growth reported by Rallis India for the quarter ended December 2017 (Q3) surprised Street, but gains were offset by a weak performance at the operating level. As a result, the Rallis stock tanked by over seven per cent to close at Rs 252 on Tuesday. However, analysts believe, any correction is an opportunity as the outlook Rallis of remains strong and recent pricing action should help margins.

Analysts estimate volumes to have grown 15 per cent on a year-on-year (y-o-y) basis during the quarter, helping Rallis post a strong revenue growth of almost 19 per cent y-o-y to Rs 3.90 billion. In India, the northeast monsoon ended with a shortfall of 11 per cent, but its impact was offset by good rainfall in key southern states and improvement in acreage for most crops (except wheat and oilseeds). 

The stress was visible with rising raw material prices, especially the surge in cost of active ingredients procured from China. Consequently, earnings before interest, tax, depreciation and amortisation (Ebitda) fell 11.5 per cent y-o-y to Rs 375 million in Q3. Net profit at Rs 249 million was lower than the figure (Rs 254 million) in the year-ago quarter.

With Rallis having undertaken price hikes in some products in December and January, the impact of higher costs of Chinese raw materials should subside. Analysts say these would help maintain margins moving forward, while growth outlook remains strong. In the domestic business, the impact of note ban and the GST-related de-stocking are behind, and the sector is benefiting from the government’s efforts towards growing farm income. 

The international business of Rallis is witnessing traction, helped by improving situation in key markets, such as Brazil, and strong demand for herbicides. The company will also get support from the last year’s low base and commercialisation of new molecule for exports in the March quarter, say analysts at Antique Stock Broking. Analysts at Kotak Institutional Equities expect Rallis to deliver a 22 per cent compounded annual increase in earnings over FY17-20 driven by a robust growth in the domestic and the international formulation businesses and expected improvement in the performance of Metahelix (a company acquired by Rallis).

HDFC Securities, too, says that a strong brand image with a diversified portfolio, an extensive distribution network and robust balance sheet will help Rallis gain incremental market share in India. Their target prices ranging Rs 290-313 indicates a potential upside of 14-23 per cent for the stock.