Company update: Rallis India (Outperformer) - Growth showers

Rallis India’s (Rallis) new product launches in domestic pesticides, contract manufacturing (CRAMS) sign-ups in exports business and strengthening presence in seeds business have helped reverse its muted growth trajectory FY17 onwards. We estimate healthy 12% revenue CAGR in domestic pesticides and large-scale opportunities to drive exports and seeds businesses at 14.2% and 15% CAGR, respectively, over FY18-20E. We estimate consolidated revenue and PAT CAGR of 13.4% and 19.6%, respectively, with significant free cash flow (FCF) of R4.6bn over FY18-20E. We maintain Outperformer rating on the stock, with a target price of Rs293/share.

Healthy traction in pesticides business: Rallis’ domestic pesticides business has improved on: 1) healthy traction in products launched, 2) strengthening distribution network and 3) changes in credit policy for dealers. The company’s focus on speciality products and new formulation launches of existing molecules will continue to drive its domestic pesticides business (12% revenue CAGR over FY18-20E), in our view.

Non-pesticides business to aid in sustainable growth: Rallis’ presence in the complete farm value chain has helped the company monetize its strong farmer connect initiatives, which we believe will drive sustainable growth in the long run. Further, growth in the company’s exports business will help mitigate the seasonality associated with domestic business. Rallis has gained a foothold in allied agri inputs like hybrid seeds, organic manure and biologicals. We expect Rallis’ seeds and exports businesses to post 14.2% and 15%CAGR, respectively (FY18-20E). Also, rising contribution from high-margin CRAMS and seeds business will help generate 18% EBITDA CAGR with 80-100bps margin improvement over FY18-20E.

Maintain Outperformer: Rallis’ ability to identify growth opportunities, strong distribution network and balance sheet make the company one of the best plays in agrochemicals and seeds space. Potential success in new formulations, higher export momentum and scale up in seeds business are key triggers for the stock. In the long run, a change in the regulatory environment (support to indigenous manufacturers and promotion of environment-friendly products) and introduction of several measures focused on improving farm income in Budget 2018-19 coupled with IMD’s forecast of normal monsoon for upcoming Kharif season will augur well for Rallis’ domestic business. Rallis’ current valuations at 21/17.3x FY19E/20E earnings are justified, given the company’s debt-free balance sheet, improving return ratios and high FCF.