Event update: Rallis India (Outperformer) - Performance to improve

We attended the analyst meet of Rallis India. The management remained upbeat on the prospects all three businesses (domestic pesticides, exports and seeds). Key takeaways:-

Volume growth momentum to continue: Management expects healthy volume growth in FY19E for both the domestic as well as international business. New product launches, easing of credit terms to dealers and strengthening distribution reach would lead to market share gains for the domestic business. The export business will be driven by recovery in the global markets along with increased focus on the CRAMs business. In FY18, Rallis invested Rs300m in the CRAMs business which is expected to add incremental 600mn to CRAMs revenues in FY19E (~2x asset turnover). The seed business performance is also expected to be robust in 1QFY19E with increased acceptance of new products. 

Margins to recover; EBITDA Margins in FY18 deteriorated by ~90bps to 14.8% due to GST implementation and pricing pressures in H1FY18, while sharp rise in raw material prices due to plant shut down in China, increase in employee costs towards hiring manpower for the CRAMS business as well as Samrudh Krishi initiatiave and certain one-off expenses (forex loss, CRAMS start-up costs, promotional activities) impacted margins in H2FY18. Management expects margins to recover in FY19E with inventory gains, lower sales returns in the seed business and increase in contribution from value added products.

Working capital cycle to improve: In FY18, there was a huge surge in working capital as the management had consciously stocked up inventory for the upcoming Kharif season which led to inventory days increasing from 87 days in FY17 to 117 days in FY18, while easing of credit terms led to debtor days increasing from 56 days in FY17 to 80 days in FY18. While the management is confident of bringing down inventories levels by the end of the Kharif season ,debtor days are expected to be in the range of 60-70 days, still below industry average (80-100days)

Rallis has successfully prioritized top-line growth over profitability. Going forward, we expect Rallis to register ~12-15% volume growth with 80-100bps margin improvement over FY18-20E. Potential success in new formulations, higher export momentum and scale up in the seeds business are key triggers for the stock. Moreover, introduction of several measures focused on improving farm income in Budget (2018-19) and IMD’s forecast of normal monsoons should augur well for Rallis.