Rallis: Some respite in March quarter, more required

Improving exports and better working capital management are positives, but a good monsoon is crucial for future growth

After a couple of quarters of muted growth, Rallis saw some respite in the March 2016 quarter. Though the environment remains challenging, the positive export numbers and improvement in cash flows provide some confidence. Net profit, helped by other income, grew 50% year-on-year (y-o-y) to Rs 32 crore and was much better than analysts' expectations. A complete turnaround, however, still hinges on a good monsoon, possibility of which weather experts say are strong.  

For the company, even as domestic revenue remained flat in the March quarter, consolidated revenue grew 8% y-o-y (Rs 348 crore), helped by higher international business. On the operating side, EBITDA margin at 12% was down 177 basis points y-o-y. Though the decline is due to a weak operating environment, the company’s efforts on working capital management are positive, analysts say. Analysts at Ambit believe steady working capital despite revenue decline is commendable. Company’s working capital days improved by two days to 74, trade receivables declined by 21% over FY15 and creditor days also improved. This is an important development as many experts in the past have raised concerns over high working capital days.

The other positive has been the completion of acquisition of the remaining 19.5% stake by Rallis in Metahelix for Rs 73.33 crore, thus making the latter a wholly-owned subsidiary. The subsidiary will drive growth of its seeds business through advanced technologies as BT (a genetically modified organism to prevent crops against insects). For the March quarter, while Metahelix grew by 1.9%, for the year it saw a 6% growth despite lower acreage in some key crops, such as paddy and corn.

Other income, however, increased to Rs 8.8 crore against Rs 0.9 crore in the year-ago quarter, which analysts attribute to receipt of payments by Metahelix towards contractual agreement related to land parcel.

While Rallis' operational performance is noteworthy given the challenging environment, the agri industry's concerns pertaining to water shortages etc, remain. The June quarter, however, may see some traction from the seed segment as farmers prepare for the sowing season thereby raising seed demand. The September 2016 quarter is also seasonally strong for agrochemicals and thus a positive. 

V Shankar, Rallis' managing director and CEO, feels confident of attaining two new customers for supplies through Dahej plant which will also see better utilisation. For now, all depends on the monsoon. 

That's also crucial for the stock, which has already gained about 36% from the lows seen in January to Rs 196.30 levels now in anticipation of a good monsoon. Emkay Research has a post-results target price of Rs 200, Edelweiss - Rs 190 and Religare Institutional - Rs 195, indicating that the near-term positives are priced in.