Rallis India's Q3FY19 results (Outperformer) - Profitability declines
Q3FY19 result highlights
Rallis reported revenue growth in line with our expectation, however EBITDA was below our estimates.
- Cons revenues grew by 7% yoy to Rs4.17bn (est: Rs4.2bn) led by revised dealer incentive structure which aided growth in domestic pesticides business coupled with improved realisation in the export business.
- Gross margins declined by 260bps due to Rallis's inability to pass on the increase in cost of raw materials imported from China owing to weak rabi season coupled with one off expenses (Rs65m). Cons EBITDA declined by 26.3% yoy to Rs276m inspite of a low base. EBITDA margins declined by 298bps to 6.6 % (est 12%).
- Higher interest cost (up 51.2% yoy) and tax rate (29.9% vs 11% in Q3FY19) further restricted PAT growth. PAT declined by 44.4% yoy to Rs138m (est:Rs334m)
Key positives: New product launches in the domestic market, higher realisations in the export market
Key negatives: Decline in Gross margins
Impact on financials: Cut EPS by 14.6%/12.5% for FY19E/20E respectively to factor in decline in gross margins. We introduce FY21e EPS of Rs13.1/sh.
Our view
Rallis reported healthy revenue growth in Q3FY19 despite weak rabi season led by market share gains in the domestic pesticides business and improved realisations in the export business. Despite healthy revenue growth, sharp increase in raw material costs impacted profitability. Going forward we expect the revenue growth momentum to continue with increasing share of speciality products, easing of credit norms to dealers ,supported by Rallis’s strong distribution network. Moreover, Rallis’s plans to invest Rs2.7bn(Rs1bn in phase 1) to backward integrate for 2-3 key raw molecules 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 Rs209 which is at 21x FY21E EPS of Rs13.1/sh. Maintain Outperformer
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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