Rallis India: Good Q1 but Street looks for more recovery signs

Higher raw material prices, rising generics share in portfolio, lower Bt cotton seed prices could weigh on profit

Rallis India’s performance in the June quarter (Q1), after a weak show in the January-March period, should provide some respite to investors. However, it might be too early to celebrate.

Revenue grew 54.4 per cent sequentially and 29.7 per cent over a year in Q1, driven by strong performance in standalone operations (up 45 per cent over a year). Part of this surge is due to the low domestic base of last year, which was impacted by channel destocking ahead of implementation of the goods and services tax. However, recent price increases, better placement of generics, higher export, led by an improving situation in key markets such as Brazil, and strong demand for herbicides did help improve business performance.

Operating profit margins at 14.5 per cent also improved, over 9.1 per cent in the previous quarter but are still a 100 basis points less over a year. Higher prices of Chinese chemicals (inputs) and lower Bt cotton seed prices (impacted Metahalix’s margins) continue to weigh on profit. The Metahelix seed business’ growth of 13.4 per cent, however, remains healthy.

While Q1 performance will address some Street concerns, including on market share, the September quarter performance will be closely watched to confirm recovery. Notably, the September quarter is seasonally strong for Rallis and the management also instigated confidence citing satisfactory progress of the southwest monsoon and sowing activities, while expectations on total acreages are also catching up with that of last year.

What could spoil the recovery is continuing pressure on raw material due to higher chemical prices ex-China, which remains a key monitorable. Rallis has taken price increases in Q1 to partially mitigate the impact of higher costs but analysts say the industry is hesitant to take significant price increase in agrochemicals. The higher share of generics in portfolio, which earns lower margins, adds to Street concerns.

“Margin pressure is expected to continue in the September quarter, while demand pick-up hinges on kharif sowing, pest infestation and prevailing crop prices,” say analysts at Prabhudas Lilladher. Analysts at Edelweiss say they prefer to monitor the ensuing quarter’s performance to change their view on Rallis.