Rallis India's Q2FY19 results (Outperformer) - Broadly in-line

Q2FY19 result highlights

• Rallis reported consolidated revenue growth of 11.2%yoy to Rs6.53bn (est.:Rs6.64bn) led by higher realisations in the domestic pesticides business and traction in export business. Growth in seed business remained soft at 6% yoy to ~Rs406m
• Gross margins declined by 90bps to 42% due to fluctuation in raw material prices (higher crude oil price and plant shut down in China). Despite stable employee costs, higher other expenses (up 24% yoy) owing to forex loss led to 191bps decline in EBTDA margins to 18.9%. Cons. EBITDA growth was flat at Rs1.23bn (est:Rs1.3bn)
• Higher other income (up 165% yoy) and lower tax rate (28.8% vs 31.4% in Q2FY18) led to 10% yoy growth in PAT. Cons. PAT stood at Rs851m (est Rs888m)

Key positives: increase in realisations in domestic pesticides and international business 

Key negatives: Decline in EBITDA margins, higher working capital

Impact on financials: Cut EPS by 0.3%/4% for FY19E/20E respectively to factor in decline in EBITDA margins

Our view

Rallis’ performance in Q2FY19 has seen an improvement despite erratic rainfall in key regions during July, August and September. Growth was driven by increase in domestic pesticides formulation sales and improvement in export demand from key markets of Brazil .Going forward, we expect the revenue growth momentum to continue with new product launches and easing of credit terms to dealers supported by Rallis’s strong distribution network, while lower inventory write-offs in seed business and stability in the raw material prices would lead to recovery in margins. Moreover, Rallis’s plans to collaborate with peers /backward integrate for key raw materials which it imports from China augurs well on account of supply-side constraints from China. Further introduction of several measures focused on improving farm income by govt and good reservoir levels positively boost prospects for upcoming Rabi. Higher working capital days remains a key concern. 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. We maintain Outperformer on the stock with revised target price of Rs221 (18x FY20E EPS)