Rallis: Some respite in March quarter, more required

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

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

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

The other positive has been the completion of acquisition of the remaining 19.5 per cent stake by Rallis in Metahelix for Rs 73.3 crore, thus making the latter a wholly-owned subsidiary. The subsidiary will drive the growth of its seeds business through advanced technologies such as BT (a genetically modified organism to prevent crops against insects). While Metahelix grew 1.9 per cent in the March quarter, for the year, it saw a six per cent growth despite lower acreage in some key crops as paddy and corn.

Other income, however, increased to Rs 8.8 crore against Rs 90 lakh 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 sector's concerns pertaining to water shortages etc remain. The June quarter, however, might see some traction from seed segment as farmers prepare for sowing season, thereby raising seed demand. The September 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 the 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 36 per cent from the lows seen in January to Rs 196.3 levels now in anticipation of a good monsoon. The post-results target price of analysts as Emkay Research - Rs 200; Edelweiss - Rs 190; and Religare Institutional - Rs 195, also indicates the near-term positives are priced in.