Rallis India's Q1FY19 results (Outperformer) - High input costs impacts profitability
Q1FY19 result highlights
Rallis reported revenue growth above our expectation, however PAT was in-line with our estimates.
- Rallis reported consolidated revenue growth of 29.7%yoy to Rs5.7bn (est: Rs4.9bn) led by strong volume growth in the domestic pesticides business (on a low base) and healthy traction in export business. Growth in seed business remained soft at ~11.3% yoy to Rs2.2bn
- Sharp rise in raw material prices (plant shut down in China) led to 654bps decline in gross margins to 39.6%. Despite stable employee costs and other expenses consolidated EBTDA margins declined by 120bps to 14.5%. EBITDA stood at Rs831m (est:Rs770m), up 19.8%
- Despite lower interest cost and stable depreciation, higher tax rate (27.8% vs 26.2% in Q1FY18) further restricted PAT growth. Overall PAT increased by 20.6% yoy to 546m (est Rs523m).
Key positives: Healthy volume growth and realisation in domestic pesticides and international business
Key negatives: Decline in Gross margins
Impact on financials: Cut EPS by 4.9%/3% for FY19E/20E respectively to factor in decline in gross margins
Our view
Rallis reported robust revenue growth in Q1FY19 led by healthy volume growth in the domestic pesticides business as well as export business. Despite strong revenue growth, sharp increase in raw material costs impacted profitability. Going forward ,we expect the revenue growth momentum to continue with new product launches and normal monsoons supported by Rallis’s strong distribution network, while lower inventory write-offs in seed business would lead to recovery in margins. Moreover, Rallis’s plans to collaborate with peers or backward integrate for 2-3 key raw materials which it imports from China augurs well on account of supply-side constraints from China. In the long run we believe, potential success in new formulations, commercialisation of new products under contract manufacturing and scale up in the seeds business are key triggers for the stock. Moreover introduction of several measures focused on improving farm income (MSP hikes) and normal monsoons in key geographies augurs well for Rallis. We maintain Outperformer on the stock with revised target price of Rs257 which is at 20x FY20E EPS of Rs12.8/sh
Rallis India Limited is engaged in the business of manufacture and marketing of Agri Inputs. The Company has its manufacturing facilities in India and sells both in India and across the globe. The Company's segments include Agri-Inputs and Others. The Agri-Inputs segment consists of Pesticides, Plant Growth Nutrients (PGN) and Seeds. The Other segment consists of Polymer. The Company's Non-Pesticide Portfolio includes Agri Services. Its Agri Services portfolio consists of the organic manure product GeoGreen, Samrudh Krishi (SK) initiative, MoPu (More Pulses) initiative and agri implements. The Company's products for crop protection, such as fungicides, including Contaf, Contaf Plus, Master and Fujione; weedicides, including Fateh, Tata Metri, Tata Panida, and insecticides, including Tata Mida, Reeva, Asataf and Manik. The Company also offers various category of products, including hybrid maize, hybrid paddy, hybrid pearl millet, mustard and wheat.
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