Weak global business could impact FY21 prospects of Rallis India

Domestic revenues and margins, are however, expected to be resilient

Sharp fall in international revenues dented the September quarter performance of Rallis India. The segment which accounted for 24 per cent of the company’s revenues (H1FY20 revenue share at 34 per cent) in the quarter fell 29 per cent y-o-y. 

The reason for the sharp decline was due to 30-40 per cent decline in volumes and realisations of herbicide metribuzin on the back of excess global inventory. In addition, what hit global revenues was the lower contract manufacturing sales due to falling offtake of fungicide metconazole and no exports of thermoplastic PEKK used in the aviation sector. Consolidated revenues declined 3 per cent due to the weakness in international sales. 

Analysts at Emkay Research believe that the worst for metribuzin has already played out in the September quarter and there could be recovery from the current quarter.  They add that the ramp-up in metribuzin capacity remains the key monitorable metric in the second half of FY21 and acts as the largest incremental swing factor in margins and earnings.

Though the international segment disappointed, performance of the domestic business (three fourths of revenues) as well gross margins were robust. A 10 per cent growth in volumes helped the company post 8 per cent growth in domestic formulations. The 29 per cent growth in the seeds segment was better than the street’s expectation and was led by the ramp up in maize and mustard volumes. 

Another positive was a 201 basis points y-o-y growth in gross margins due to lower input costs and higher realisations from domestic formulation sales. The gains however did not percolate down to the operating profit level given the higher costs related to capacity expansion of metribuzin. 

While brokerages have cut their earnings estimates for FY21 due to the weakness in exports they expect medium term growth to be strong led by new product launches in the domestic market, benefits from ongoing expansion and favourable margins. Kotak Institutional Equities expects the company to double its profits over the FY20-23 period. 

After the 5 per cent correction post its results and the 20 per cent fall from August highs, analysts believe the stock is attractively priced and could offer healthy returns over the medium term.