Rallis India: Rich harvest - Buy

If you are looking for a healthy bet on the rural revival theme, given that the general elections are due next year, Rallis India may present an attractive opportunity.

India’s increasing population, low per hectare yield, loss in crop output of 15-25 per cent a year due to weeds, pests and diseases — all present an opportunity for agro-chemical players.

Rallis India, a Tata group company in the agro-chemical space, looks like a value buy. At the current market price of ₹175, the stock discounts its estimated earnings for 2019-20 by 14 times; its five-year average PE multiple is 23 times.

After a challenging year (2017-18) due to higher raw material prices, GST implementation and weak demand following an erratic monsoon, the first half of 2018-19 has been reasonably good for the company. Revenues and profits were up 17 per cent in the April-September 2018 (on consolidated basis) period on a Y-o-Y basis. The export business did well with demand being strong and a weak rupee helping realisations. Growth in the domestic business was helped by price increases across product categories. Over the next one-two year period, prospects look good for the company with new products gaining traction and the likelihood of greater revenues coming from CRAMS (contract research and manufacturing service for pharma companies).

The company’s efforts in establishing direct contact with farmers by providing agro-advisory services through Samrudh Krishi – a programme which was started in 2011 – have started yielding results, with the extent of the reach being 1 million farmers now. This may increase in the next one year and drive revenue for the company. Metahelix Life Sciences, the company’s subsidiary that manufactures hybrid seeds, should also do well given its focus in brand building.

Diversified business

Rallis has presence across the agriculture value chain, from seeds to crop protection chemicals to plant-growth nutrients. It also entered into contract manufacturing last year. The company commands 7 per cent market share in the domestic crop protection chemicals market, while its market share in the seed segment, through its subsidiary Metahelix, is around 3 per cent. It has a network of 3,500 distributors and 43,000 retailers and is present in 80 per cent of the districts of the country.

Rallis commissioned its facility for CRAMS in the last quarter of 2017-18 in Dahej with a total capex of ₹30 crore. With supply shortage in many chemical ingredients in the global market, following the shutdown of many factories in China due to pollution concerns, it was a well-timed entry into CRAMS by Rallis. For 2018-19, the expectation is that this segment will be one of the strong growth drivers for the company.

In the first-half of 2018-19, Rallis managed double-digit revenue growth, thanks to price hikes across products. Long dry spells due to a deficient monsoon kept pests under control. Further, prices of all key crops, including paddy, pulses and soya bean, were below MSP and curtailed spending by farmers.

External factors — the rupee/dollar exchange rate (from 65 versus the dollar last year to 73 in the first-half of the year) and crude prices ($50-55/barrel to $75/barrel) were also unfavourable for the company. Rallis imports a significant portion of its input chemicals and these chemicals track crude oil price movements.

The momentum in the company’s ‘Samrudh Krishi’ programme, reaching 10 lakh farmers across 14 crops, was an achievement though, in the first-half of the year. The company’s digital initiative — Drishti — has also been doing well and helping farmers in crop planning and bringing them back as customers to Rallis.

Margin pressure to continue

Operating profit margin in the September 2018 quarter was 18.9 per cent versus 20 per cent in the same quarter of the previous year. Margin pressure may continue over the next one or two quarters. As supply of inputs remain tight with shutdown of factories in China and liquidation of inventories not quick in the domestic market, there may not be immediate translation of higher costs to higher price on products. The company is looking for alternative suppliers, but it looks like the situation may take time to stabilise.

There is stress on the working-capital cycle too for the company with negative market sentiments. But the management expects the situation to change with liquidation of stocks, as demand picks up.

Rallis, however, has a strong balance-sheet with cash and investments totalling ₹112 crore as of September 2018.