Rallis India: Sow seeds, reap rewards - Buy

Investors willing to stay put for one to two years, can buy the stock of Rallis India at the current price and accumulate if prices fall further. Weak results and negative rural sentiment have pulled the stock down in the last one year. However, the new management’s aggressive plans to expand over the next one year and revive the sagging growth in the domestic market, give hopes.

Sanjiv Lal, the MD & CEO, and S Nagarajan, the COO, plan to expand the distribution network and product portfolio in seeds and allocate funds for brownfield expansion in capacity to seize opportunity in certain molecules in the export market.

While there may not be any good news for investors over the next two quarters, given that the South-West monsoon is not likely to be good enough, the company will do well over a two-year time-frame. With the growing population and the resultant pressure on crop yields, there is increasing need to arrest weed and pest attack. This can result in strong demand for players, including Rallis India. At the current market price of ₹142, the stock discounts its estimated price-earnings multiple of 2019-20 by 12 times. It was trading at a PE of 14 times on one-year forward earnings six months back.

On trailing earnings of one year, the stock trades at a PE multiple of 18 times. Its five-year average PE is 23 times.

Rallis’ diversified agri portfolio with presence in crop protection chemicals, plant growth nutrients and seeds, makes it a good play on the rural theme. Both the UPA and NDA have made several promises in their election manifesto to reduce rural distress and put more money in the hands of farmers. So, irrespective of which party wins and forms the government, farmers are poised to see better days.

Growth drivers

Rallis’ new management is putting in place a strong product pipeline of new launches. Actually, work on the product front began a few years back. The company is now looking at bringing 11-12 new products into the market over the next few years. Of these, five would be launched by the end of 2019-20.

Rallis also has plans to source more molecules via in-licensing and core marketing agreements by forming alliances with new partners.

Further, in the seeds business, Metahelix Life Sciences — the company’s subsidiary that makes hybrid seeds — plans to set foot into maize and vegetables through in-licensing from other seed developers. This is to help till the company’s own hybrids in these products are ready for marketing. Currently, Metahelix has its own hybrids in paddy and millets.

Rallis has a strong distribution network in the western and southern markets and is attempting to grow its presence in the northern and eastern markets. From a total of about 3,500 distributors, Rallis intends to add 600-700 more distributors during the year and take the number of connected retailers to 42,000 from the current 35,000-36,000.

In the international business, Rallis has been seeing good opportunity in one of the key molecules and plans to expand production capacity by investing about ₹40 crore. This would double the capacity in the molecule, Metribuzin, from about 1,000 tonnes per annum to about 2,000 tpa. Capacity commissioning will be done in two phases and is likely to be over between July and December of the current year. The company holds a 12 per cent market share globally in the market for Metribuzin.

In the March 2019 quarter, the company’s revenue dropped by 8.5 per cent, Y-o-Y. This was due to drop in demand for the company’s products on account of relatively low pest infestation and acreage under key crops in the South because of unfavourable monsoon.

However, for the full year 2018-19, the company recorded an increase of 9.7 per cent in revenue to ₹1,983.96 crore. Net profit for the same period was ₹154.78 crore, down about 7 per cent due to higher raw material costs and employee expenses.

Margin pressure may continue

In the March 2019 quarter, raw material costs as a percentage of sales were reported at 56.8 per cent, up from 54.4 per cent from the same quarter last year. For the full year 2018-19, this was 59.1 per cent versus 55.4 per cent in 2017-18.

Operating profit margin for the full year was 12.1 per cent, contracting from 14.6 per cent in the last year.

It looks like the company may face margin pressure for some more time.

Rallis’ management has indicated that with the shutdown of factories in China, prices of many key chemicals may continue to rise in the global market. While the company is trying to pass on the costs to customers, the sluggish demand is not providing room.