Rallis India: Metahelix saves the day

GST-led destocking hurts agrochemicals' sales, offsetting rise in margins in seeds business

Agrochemicals and seeds major Rallis India put up a weak show during the June quarter largely due to the goods and services tax (GST)-led destocking of inventory by trade partners. 

Pesticide sales were impacted as channel placement was severely disrupted, leading to a decline in agrochemicals’ (crop protection and pesticides) revenue during the period. Though the international business, which includes contract manufacturing for exports, witnessed a double-digit growth, it wasn’t enough to lift the standalone revenues, which remained flat.

The company also continued to invest in its business, which, coupled with higher other expenses, led to a 65 per cent year-on-year (y-o-y) fall in standalone Ebitda (earnings before interest, tax, depreciation and amortisation) at Rs 8.4 crore. Adjusted profits were also lower than expectations.

This decline in standalone performance partly offset the benefits of better margins in the seeds business reported by the company’s subsidiary, Metahelix. The seeds business reported about a five per cent growth in revenue. But, this was slightly lower than the Street’s expectation. Offtakes for the maize and hybrid rice seed segments were less-than-expected as paddy cultivation in the central region was hit. But, there was a remarkable improvement in profitability as margins expanded 460 basis points to 30.8 per cent during the reporting quarter, helped by cost-control measures. Metahelix’s Ebitda increased 23 per cent y-o-y to Rs 61 crore, providing cushion at the consolidated level.

Rallis’ consolidated Ebitda at Rs 69.4 crore declined just nine per cent y-o-y. Reported consolidated net profit at Rs 43 crore declined about 19 per cent y-o-y.

The firm expects an increase in taxes as tax benefits against accumulated losses in the seeds business are exhausted.

Analysts at Kotak Institutional Equities have cut their FY18-20 EPS (earnings per share) estimates by three per cent to account for higher effective tax rate. While the June quarter was a mixed bag, hopes remain high on Rallis, looking at the strong monsoon prospects. 

Managing Director and Chief Executive Officer V Shankar said he was pleased rains had covered the entire country and the forecast was of a normal monsoon. A good kharif season will buoy farmers’ sentiments and improve farm income required to boost agriculture. 

Analysts believe the demand for agri-inputs is likely to grow strongly in the current financial year as farmers’ incomes have improved significantly on account of successful rabi and kharif seasons in FY17. 

A normal monsoon and the low base of last year should lead to a better growth in FY18. All eyes are now on the company’s September quarter (Q2) performance to assess the impact of the monsoon, which will provide an indication of the year ahead. The stock has already gained in anticipation of a normal monsoon and hence its progress, especially the distribution of rainfall across India, and the company’s Q2 performance will be key for further upside.