Rallis India stares at further downgrades

The company sees another disappointing quarter, led by headwinds in domestic as well as global operations

The Rallis stock was down six per cent in trade on Tuesday on expectations of earnings downgrades as the December 2015 quarter results were below analysts’ expectations. Consolidated net profit was down 20 per cent year-on-year (y-o-y); sales numbers, too, were down 20 per cent over the year-ago quarter. As in the September 2015 quarter, net profit has missed analysts’ expectations by 25 per cent in the December quarter as well. Standalone net profits dropped 18 per cent owing to tax benefits.

According to the management, what has impacted sales was muted farmer sentiments due to reduced kharif yields and lower prices of key crops. Unseasonal and deficient rains have also played a role with deficiency in north-east monsoon and lower level of reservoirs across key rabi crop growing states affecting crop acreages and health. The fall in crop protection products’ demand and usage impacted the sales of the company’s key brands for paddy and pulses.

The standalone agrochemicals business saw revenues decline by 21 per cent y-o-y due to high channel inventory, falling acreages and a weak global demand environment along with market share loss for Rallis, according to analysts at Ambit Capital. What has impacted sales further has been the performance of Metahelix, its seeds subsidiary which posted revenue fall of 17 per cent over the year-ago period. This business has earlier been one of the mainstays of growth for the company. While this segment has grown at a compounded annual rate of 48 per cent over the FY13-15 period on the back of new launches, growth momentum over the past few quarters is coming down. Margins in this business have also been impacted given investments in research and development, branding, and field trials.

The problem for Rallis has been compounded by muted demand environment both in the domestic and overseas geographies. In addition to a weaker presence in the fast-growing Indian herbicide market and slow improvement in the contract research and manufacturing business, domestic business has been lacklustre due to lower number of launches. Exports, which form 30 per cent of consolidated sales, have been impacted by competitive pressures and declining crop acreage in Brazil and the US. At the current price, the stock is trading at 18 times its FY17 estimates, which is not cheap.