Rallis: Growing seed, agrochemical portfolio provides zing

While seeds business continues to do well and new agrochem products should drive growth and margins, a weak monsoon could take away some sheen

Rallis India’s revenue for the quarter ending March was slightly below expectation but the margins were encouraging for the agro-chemicals company, looking at the challenges posed by unfavourable climatic conditions.

V Shanker, managing director and chief executive officer, said a combination of factors such as right products, right mix and marketing initiatives led to the improvement in profitability, despite the challenges.

For the quarter, consolidated revenue at Rs 322 crore declined three per cent over a year before, lower than the Bloomberg consensus estimate of Rs 358 crore (7.7 per cent fall in standalone revenue) as a deficient monsoon, lower rabi sowing and unseasonal rain took a toll. However, earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 44.4 crore, up 6.4 per cent year-on-year and a tad better than the estimate of Rs 44 crore; the margin improved 120 basis points to 13.8 per cent.

However, a 38 per cent decline in other income and 15 per cent increase in tax expenses restricted net profit growth to 10.5 per cent and, hence, profit at Rs 21.3 crore was lower than the Bloomberg consensus estimate of Rs 23.1 crore.

For all of FY15, the trend was similar. Revenue at Rs 1,822 crore was lower than the Rs 1,888 crore estimated by Bloomberg, Ebitda at Rs 283 crore was better than the estimate of Rs 281 crore and net profit at Rs 158 crore slightly lower than the estimate of Rs 168.6 crore, due to higher depreciation and lower other income. Though revenue was not up to the mark, the good operating performance helped.

The seed business saw good growth. Hybrid seeds in maize, paddy and millets got a good response. Ebitda margin for this segment in FY15 was 7.7 per cent as compared to 6.5 per cent in FY14, boosting overall profitability.

Rallis' acquired hybrid seed subsidiary, Metahelix, saw a 38 per cent rise in revenue to Rs 300 crore and profit almost doubled to Rs 17 crore. Traction in the seed business continues and the company’s ratio of non-pesticide to crop protection products has improved to 33 per cent from 31 per cent in FY14. It aims to improve this further to 40:60.

Duton, Origin and Hunk among the crop protection products have also got an encouraging response from farmers. The company also shipped its first consignment of crop protection products from its new Dahej-based facility.

While the improving seed portfolio and new crop protection products are likely to continue driving the growth, there are challenges. The recent forecast of below normal rain is one. Shankar says timely onset of the monsoon and its distribution will have to be watched for. Adding, “We at Rallis now believe that volatility is a way of life and will be relying on right solutions and the right portfolio, based on quick ground feedback, to decide the course of action and marketing plans.”

A weaker than expected monsoon could have some bearing on the company’s fortunes.

Analysts remain positive on the prospects, even if they tweak their estimates. Analysts at Emkay Global have reduced their revenue estimate by six per cent each for FY16 and FY17 and, thus, their earnings estimate by eight per cent and seven per cent, respectively. However, they maintain their 'Buy' rating on the stock, as they believe strong traction for the seeds business and product launches in the agrochemical business will drive revenue growth and improvement in Ebitda margins.

While their target price stands at Rs 298, the consensus one among analysts polled on Bloomberg in April is Rs 257, an upside potential of 19 per cent from the current Rs 216.