Rallis India: Market share gains ahead

New products, incremental exports and seed business growth to aid overall revenue

The Rallis India stock had moved up nine per cent last week on expectations of market share gains led by strong volume growth and product launches. A further traction in contract manufacturing and research with commercialisation of new molecules and recovery in the global agrochemical market should give a fillip to exports. This should translate into strong revenue and earnings growth.

The near-term trigger would be a recovery in volumes on the back of restocking of trade channels disrupted due to the implementation of the goods and services tax (GST).

Analysts at IDFC Securities said in FY18, domestic business growth (60 per cent of consolidated revenues) would remain strong with restocking at dealers' level, improving reservoir levels and increasing pesticide product prices. The company is expected to offset the recent rise in raw material costs by raising prices that should help it to maintain operating profit margins at around 20.8 per cent levels registered in the September quarter.

Product launches will be a key revenue trigger. The company that introduced three products, including fungicides and insecticides in the September quarter, will be launching products in the domestic business, which is expected to translate into higher market share.

Analysts at Angel Broking said wide distribution, strong brands and a robust product pipeline would help the company grab market pie and charge a premium for its products.

Another positive is a change in regulatory environment policies, favouring indigenous manufacturers and promotion of environment-friendly products.

What will add incrementally to the company’s revenue growth is higher focus on exports, which includes contract manufacturing and growth in the seeds business.

The company expects to commercialise new products under contract manufacturing, which, coupled with a recovery in global agrochemicals demand, is expected to drive the exports business. Exports account for about 30 per cent of sales. In the seeds business, the company is strengthening its cotton portfolio by launching products.

CRISIL last week upgraded the firm's long-term rating, highlighting the fact that higher focus on exports, including contract manufacturing and seeds business, will improve the revenue diversity and aid business growth over the medium term. They expect revenues to grow 10-12 per cent over the medium term, with profitability at 17-18 per cent.

At the current price, the stock is trading at 22 times its FY19 earnings estimates. Given the recent uptick, investors can look at the stock on corrections.