Rallis: Monsoon key to revival in performance

July has seen a revival in monsoon and if the pace continues, Rallis can rebound

The performance of Rallis for the June 2015 quarter has disappointed the Street. While the March’15 quarter was impacted by unexpected rain, uncertainty over rainfall spoiled the June quarter. On a consolidated basis, net sales remained flat, while Ebitda (earnings before interest, tax, depreciation and amortisation) declined about four per cent and margins by 50 basis points. Thus, profits fell 10.4 per cent.

The Street has not taken it lightly. The stock was down 12 per cent to Rs 225 post-results and analysts raised concerns.

July has seen a revival in the monsoon and if the pace continues, Rallis’ performance can rebound. The company has attributed the pressures seen in the quarter to the farmer spending that was hit after a subdued rabi crop, as caution prevailed for the next crop season as well due to concerns on monsoon. In this backdrop, placement of crop protection products in the dealer network also got delayed. Rallis, which exports almost third of its produce, also saw its largest market Brazil getting hit by unprecedented drought (worst in last 80 years) and poor commodity prices leading to down-trading of agro products in the US.

 

HSBC analysts point out that the Rallis’ management has indicated weakness in exports (part of standalone sales). However, despite adjusting this, they estimate the sales decline for Rallis in the domestic crop protection products business must be around double-digit. Pointing to the growth in the domestic crop protection industry (Bayer Cropscience’s topline grew 17 per cent year-on-year) in the June quarter, analysts believe Rallis has lost some market share which is of concern.

While the dispatch of crop protection products to dealers has picked up after the initial rainfall, during the quarter some benefits were also seen to have accrued in Seed segment. Rallis’ seeds business did well and is estimated to have posted 20-23 per cent revenue and earnings growth. Although margins disappointed, the sales of Metahelix, a subsidiary of Rallis, were up 25 per cent and net profit 20 per cent year-on-year, as its hybrid seeds continued to gain market share.

After some good rainfall, Rallis remains optimistic.

V Shankar, managing director and CEO of Rallis India, said more than 62 per cent sowing has completed and company’s sales are picking up. The company has also launched two herbicides Parinda Grande for cotton crop and Mark used in soya bean, which have seen good response. Crop protection product sales are thereby expected to return to normalcy, as the September quarter is also generally strong.

While analysts at HSBC remain cautious, others believe that Rallis’ sales will revive. Analysts at Prabhudas Lilladher expect Rallis to deliver 21 per cent earnings CAGR (compound annual growth rate) over FY15-FY17, stable margins at about 16 per cent and high return on equity of 23 per cent. Analysts at IDFC Securities expect the new launches to drive a 12 per cent CAGR in the core pesticides business (52 per cent of FY14 revenues) over FY14-17. They also see increased traction in the domestic business, led by higher sale of non-pesticide agriculture inputs. With the share of high-margin new products increasing, they expect 80-150 basis points Ebitda margin expansion over the next three years.