Sustained growth needed for Rallis' stock to rerate, regain market share

After gaining about 18 per cent last month, the Rallis stock has given up most of the gains. While the Street is positive on the long-term prospects of the company, driven by multiple initiatives to boost growth, sustained growth is necessary for the stock to rerate. Among the issues it faces is its inability to gain market share, despite a slew of product launches. 

The company has launched 16 products over the past five years. Despite this, it has lost market share, given the poor response to some of the launches. A lower share of branded business (less than 30 per cent) and higher generic launches remain a worry. 

The company, however, is planning to launch two new products every year till 2022. It expects the launches to help perk up the sales graph. It is also relaxing its trade credit policy, in line with the market, and incentivising dealers, which should expand its reach and distribution strength.

Apart from product launches, there are other triggers for the stock. The company is looking at a capital expenditure of Rs 800 crore to develop new active ingredients and enhance its backward integration linkages. 

The plant for a key intermediate for herbicide Metribuzin will help meet 50 per cent of Rallis’ raw material requirement over the next six months, which will be scaled up gradually in phases. The intermediate production will help it to reduce its dependency on the China market. 

Among the opportunities for the company is the shifting demand from China, given the clampdown on chemical manufacturers. This, coupled with the fact that 26 agrochemical active ingredients are going off patent between 2017 and 2022, offers it a revenue opportunity as an outsourcing partner. Further, the expansion of the international business could derisk its revenues as it offsets muted growth in the domestic markets. 

While these initiatives are a positive, analysts at Edelweiss Research expect these investments to initially fetch lower returns and dilute margins. They have a ‘hold’ rating, despite an expectation of a strong showing in the second half of 2019-20.