Company update: Rallis India (Outperformer) - Sowing the seeds of growth

The last few years have seen Rallis lose significant ground versus most peers across domestic and exports segments. Factors that led to Rallis’ lacklustre growth include tight credit policy in the domestic market, conservative capex approach in exports, raw material pressures, etc. Muted profitability over FY15-19 led Rallis to undertake multitude of strategic initiatives – the company effected a change at the senior management level (since April 2019) and also signalled a marked step up in capex to Rs8bn over FY19-23E (Rs2.4bn over FY15-19) to enhance capacities in existing and new molecules and to backward integrate. On the domestic front, it has embarked on relaxing credit norms, introducing specialty products, rationalising distribution channel, broadening seeds rabi portfolio, etc – all steps in the right direction, in our view. Overall, management expects export business to drive growth, with the domestic-export revenue mix altering from 67:33 currently to 60:40, going ahead. We estimate 11.8% consolidated revenue and 20.9% PAT CAGR over FY19-21E. Maintain Outperformer rating with a target price of Rs187.

Exports – stepping up investments: Strong demand for molecules (Metribuzin, Pendimethalin etc) in Rallis’ B2B pesticides business led to healthy ~7.9% CAGR over FY15-19 and ~36% growth in FY19 in its exports business (33% of overall revenues). At an outlay of ~Rs3.5bn (out of the 8bn capex announced) company plans to 1) double capacities in these molecules (currently with 100% utilisation) and 2) invest in new molecules (going off-patent) with strong growth potential. We estimate 20.4% CAGR in the exports business over FY19-21E.

Focus on wider portfolio for domestic business: With the introduction of speciality products, we expect 6% and 13.5% revenue CAGR in domestic pesticides and seeds businesses, respectively, over FY19-21E. The company has a healthy pipeline of 11-12 products for next 5 years and also intends to develop a rabi portfolio for its seeds business. As the company expects these products to generate meaningful returns after 2 years, Rallis may get into co-marketing alliances in the interim to drive growth.

Valuation and View

We believe, Rallis’ aggressive capex outlay and various strategic initiatives will enable the company to reverse its muted profitability trend and step up revenue growth. The next two years will be crucial for the transition, in our view, with meaningful pick up expected from FY21E onwards. Moreover, growth in export business will help mitigate the seasonality associated with the domestic business. At 14x FY21E P/E, we see room for upside, supported by improvement in earnings and return ratios. Maintain Outperformer rating with a target price of Rs187 (16x FY21E P/E).