Challenging times continue for Rallis India as Q4 net sees 93% decline

Despite the company's efforts to turn around the domestic business, analysts expect benefits to accrue only after 6-9 months

Agrichemicals and seeds major Rallis India continues to disappoint the Street given the lower-than-expected performance for March 2019 quarter (Q4). A 93 per cent decline in consolidated net profit stumped both investors and analysts, even as a weak performance was expected due to the challenging environment. While revenues at Rs 340 crore declined 8 per cent year-on-year in Q4, they were much below Bloomberg consensus estimates of Rs 396 crore. Operating profit at Rs 6.7 crore declined 80 per cent year-on-year and Rallis just managed to break even with a net profit of Rs 1.3 crore. Not surprising that the stock lost 4 per cent on Friday; it now trades near its three-year lows.
 
While the March quarter is seasonally soft for its seeds subsidiary Metahelix Life Sciences, the impact of a weak Rabi season just gone by and subdued crop prices impacted Rallis significantly. High channel inventory and low pest infestation have aggravated the operating environment for domestic agrochemical players. Rallis, too, said that it has witnessed tough conditions in the domestic business, which has declined by 25 per cent in Q4, as per analysts.
 

Rallis, however, is reorienting and committed to continued investments to grow. With capex of about Rs 800 crore lined-up over 4-5 years in brownfield expansions and adding new molecules, it is also working on expanding distribution network (plans doubling retail presence) and product basket in seeds business. To reduce the cyclicality in Metahelix, Rallis is eyeing some in-licensing products for the Rabi season as well until its own products reach commercial stage. Though this capex-led growth is much needed (Rallis was going slow on capex over the past 4-5 years and has been losing market share, too), the environment has become more challenging in domestic distribution as well as CRAMS business, say analysts at Edelweiss who remain cautious on the stock.
 
Analysts at Prabhudas Lilladher, too, say that even with the steps that are being planned, they are unlikely to see a material change in earnings over the next 6-9 months. “Even as the launch pipeline for FY20 is healthy, it may take two years for new products to create material impact in the overall portfolio,” they add. Consequently, post results they have downgraded their FY20 and FY21 revenue, operating profit and profit estimates for Rallis by 4, 27 and 28 per cent, respectively, to factor in lower earnings growth.