Rallis India's Q4FY19 results (Outperformer) - Disappointing show

Q4FY19 result highlights

• Cons. revenues declined by 8.5% yoy to Rs3.4bn (est :Rs3.9bn) owing  to  subdued  performance of the domestic pesticide business and weak rabi season. Revenues from the domestic pesticides business declined by 20% yoy largely due to fall in volumes , while the international business registered 10% yoy growth in Q4FY19
• Gross margins declined by 240bps to 43.2% on higher cost of  raw material imported from china. Cons. EBITDA registered a sharp fall of 79.8% yoy to Rs68m (est.: EBITDA margins declined by 708bps to 2 % (est 8.6%) on negative operating leverage.
• Despite higher other income (up 296%), higher tax rate led to 93% yoy decline in PAT. Cons PAT stood at Rs14m (est : Rs174m)
• Rallis incurred one off expense of Rs72m on account of retiral benefits and Rs50m contribution to electoral fund in the standalone accounts

Key positives: Steady growth in the international business

Key negatives: Weak performance of the domestic pesticide business

Impact on financials:  Cut FY20E/21E EPS by 10%/13% respectively owing to a low FY19 base

Our view

Rallis’s FY19 performance was impacted by a weak rabi season leading to muted growth in the domestic pesticides business, however its export business reported strong 36% growth. Going forward, a good early monsoon predictions along with various initiatives undertaken by the company like introducing speciality products, easing of credit norms to dealers supported by strengthening of distribution network will aid in recovery. Rallis has embarked a capex of Rs 8bn over the next 5 years to increase capacities in existing and new molecules and also to backward integrate. In the long run, Rallis’s aggressive capex outlay and various strategic initiatives undertaken by the company will help the company transition to a high growth phase. Management expects its export business to drive growth in its bid to alter the domestic-export revenue mix from 70:30 currently to 60:40 in the coming years. Moreover introduction of several measures focused on improving farm income and normal monsoons in key geographies augurs well for Rallis. We maintain Outperformer on the stock with revised target price of Rs181 which is at 16x FY21E EPS of Rs11.3/sh.