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Rallis India’s (RAIL) 3QFY2011 results were broadly in line with our estimates.
Total sales grew 31.2% to `271.4cr, which was 6.7% ahead of our estimate of
`254.4cr. However, EBITDA margin at 19.1% came in 90bp below our estimate.
We remain Neutral on the stock.
Normal monsoon aids growth: Overall, the domestic industry turned in a good
performance on the back of normal monsoons (21% ahead of long-term
average). Sowing across the country has been good, but for few crops like maize
and jowar, which witnessed a decline in area. The domestic agrichemical industry
is expected to have lost some sales during the quarter due to late rainfall
witnessed in Nov-Dec 2010. RAIL’s domestic business recorded ~30% yoy growth
in volume during 3QFY2011.
Higher raw material prices impact OPM: For 3QFY2011, RAIL reported lower
gross margin of 41.3% (42.9%) owing to increase in raw material prices and
higher excise duty of 10% (up from 8%) that was not passed on. Thus, the
company reported EBITDA margin of 19.1% for the quarter, which was 90bp
below our estimate.
Outlook and Valuation: Given that monsoons were slightly above normal and late
rainfall affected sales, the same is likely to be booked in 4QFY2011. We maintain
our estimates and expect the company to register a CAGR of 24% and 32% in net
sales and profit over FY2010-12, respectively. On the bourses, post
out-performing the Sensex by 102% over the last one year, at current levels, the
stock is trading at fair valuations of 15.7x FY2012E EPS. Hence, we remain
Neutral on the stock.
EBITDA margin under pressure
For 3QFY2011, RAIL reported EBITDA margin of 19% (21%), which was a
marginal 90bp below our estimate of 20%. Margins fell primarily due to the
following reasons: 1) hike in excise duty to 10% from 8% that was not passed on,
and 2) rising commodity prices, which increased the raw material cost. During the
quarter, raw material cost as a % of sales, increased from 57% in 3QFY2010 and
2QFY2011 to 59% in 3QFY2011
Earnings growth in line with estimates
Adjusted PAT for the quarter came in marginally ahead of our estimates registering
21.3% yoy growth to `33.7cr (`32.1cr). Growth in PAT was lower compared to
sales, on account of the 200bp reduction in EBITDA margin.
Management meet - Key takeaways
Overall, the domestic industry turned in a good performance on the back of
normal monsoons (21% ahead of long-term average). Sowing across the
country has been good, but for few crops like maize and jowar, which
witnessed a decline in area. The domestic agrichemical industry is expected to
have lost some sales during the quarter due to late rainfall witnessed in Nov-
Dec 2010. However, this sale is likely to be booked in 4QFY2011.
The Dahej plant has commenced trial runs, but being a SEZ unit, it avails fiveyear
tax break. Hence, management is still to finalise the date of commencing
commercial operations.
Amidst a high agri commodity price scenario, management expects the area
under cultivation to increase going ahead, thus strengthening the outlook for
FY2012.
In the MoPU project where RAIL is in partnership with Tata Chemicals for
selling branded pulses, has started pilot operations. Under the arrangement,
RAIL’s would source, clean, polish and package the pulses, while Tata
Chemicals would be involved in selling, distribution and branding of the same.
Pulses would be sold under the existing brand of i-Shakti.
Investment Arguments
Set to seize rising opportunities in the domestic pesticides market: India's overall
pesticides consumption is one of the lowest in the world, and we believe that RAIL
is well-placed to seize this opportunity on the back of its wide distribution network,
strong brands and robust new product pipeline. According to industry estimates,
the unorganised market accounts for another 50% of the industry. Nonetheless, we
believe that RAIL is in a position to wrest market share as well as charge a
premium for its products.
Exports to register steady growth: Closing down of capacity in China before the
Olympics 2008 and MNCs diversifying their base to India had resulted in the
company’s exports spiking 80% in FY2009 to `295cr. The scenario however
changed post the Olympics and many closed capacities have come on stream and
commodities prices corrected due to which exports declined by 35% in FY2010.
Against this backdrop, we estimate RAIL to post a CAGR of 40% in exports over
FY2010-12.
Contract manufacturing to be next growth driver: RAIL plans to focus on contract
manufacturing (CM) for exports and selectively target and supply to the top
players. To facilitate the same, the company is setting up a new plant at Dahej.
Overall, RAIL targets to achieve cumulative revenues of `1,000cr over the next five
years from this segment alone.
Outlook and Valuation
Given that the monsoons have been normal, industry expects to continue to
register healthy growth in FY2011. With RAIL being a major player in the domestic
market, we expect it to grow at a higher pace than industry. We maintain our
estimates and expect the company to register a CAGR of 24% and 32% in net sales
and profit over FY2010-12, respectively. Post out-performing the Sensex by 102%
over the last one year, at current levels, the stock is trading at fair valuations of
15.7x FY2012E EPS. Hence, we remain Neutral on the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Rallis India – 3QFY2011 Result Update
Angel Broking maintain Neutral view on Rallis India.
Rallis India’s (RAIL) 3QFY2011 results were broadly in line with our estimates.
Total sales grew 31.2% to `271.4cr, which was 6.7% ahead of our estimate of
`254.4cr. However, EBITDA margin at 19.1% came in 90bp below our estimate.
We remain Neutral on the stock.
Normal monsoon aids growth: Overall, the domestic industry turned in a good
performance on the back of normal monsoons (21% ahead of long-term
average). Sowing across the country has been good, but for few crops like maize
and jowar, which witnessed a decline in area. The domestic agrichemical industry
is expected to have lost some sales during the quarter due to late rainfall
witnessed in Nov-Dec 2010. RAIL’s domestic business recorded ~30% yoy growth
in volume during 3QFY2011.
Higher raw material prices impact OPM: For 3QFY2011, RAIL reported lower
gross margin of 41.3% (42.9%) owing to increase in raw material prices and
higher excise duty of 10% (up from 8%) that was not passed on. Thus, the
company reported EBITDA margin of 19.1% for the quarter, which was 90bp
below our estimate.
Outlook and Valuation: Given that monsoons were slightly above normal and late
rainfall affected sales, the same is likely to be booked in 4QFY2011. We maintain
our estimates and expect the company to register a CAGR of 24% and 32% in net
sales and profit over FY2010-12, respectively. On the bourses, post
out-performing the Sensex by 102% over the last one year, at current levels, the
stock is trading at fair valuations of 15.7x FY2012E EPS. Hence, we remain
Neutral on the stock.
Sales growth exceeds our estimates marginally
RAIL posted top-line growth of 31.2% to `271cr, which was marginally ahead of
our estimate of `254.4cr. Top-line was driven by the company’s robust
performance in the domestic market (approximately 30% volume growth) that
witnessed strong demand for pesticides, along with revival in exports. During the
last two quarters, the company launched three new products in the domestic
market, which supplemented growth in 3QFY2011. However, the domestic
industry lost some sales due to late rains in Nov-Dec 2010, which resulted in lower
spraying by the farmers. However, same is likely to be booked in 4QFY2011.
EBITDA margin under pressure
For 3QFY2011, RAIL reported EBITDA margin of 19% (21%), which was a
marginal 90bp below our estimate of 20%. Margins fell primarily due to the
following reasons: 1) hike in excise duty to 10% from 8% that was not passed on,
and 2) rising commodity prices, which increased the raw material cost. During the
quarter, raw material cost as a % of sales, increased from 57% in 3QFY2010 and
2QFY2011 to 59% in 3QFY2011
Earnings growth in line with estimates
Adjusted PAT for the quarter came in marginally ahead of our estimates registering
21.3% yoy growth to `33.7cr (`32.1cr). Growth in PAT was lower compared to
sales, on account of the 200bp reduction in EBITDA margin.
Management meet - Key takeaways
Overall, the domestic industry turned in a good performance on the back of
normal monsoons (21% ahead of long-term average). Sowing across the
country has been good, but for few crops like maize and jowar, which
witnessed a decline in area. The domestic agrichemical industry is expected to
have lost some sales during the quarter due to late rainfall witnessed in Nov-
Dec 2010. However, this sale is likely to be booked in 4QFY2011.
The Dahej plant has commenced trial runs, but being a SEZ unit, it avails fiveyear
tax break. Hence, management is still to finalise the date of commencing
commercial operations.
Amidst a high agri commodity price scenario, management expects the area
under cultivation to increase going ahead, thus strengthening the outlook for
FY2012.
In the MoPU project where RAIL is in partnership with Tata Chemicals for
selling branded pulses, has started pilot operations. Under the arrangement,
RAIL’s would source, clean, polish and package the pulses, while Tata
Chemicals would be involved in selling, distribution and branding of the same.
Pulses would be sold under the existing brand of i-Shakti.
Investment Arguments
Set to seize rising opportunities in the domestic pesticides market: India's overall
pesticides consumption is one of the lowest in the world, and we believe that RAIL
is well-placed to seize this opportunity on the back of its wide distribution network,
strong brands and robust new product pipeline. According to industry estimates,
the unorganised market accounts for another 50% of the industry. Nonetheless, we
believe that RAIL is in a position to wrest market share as well as charge a
premium for its products.
Exports to register steady growth: Closing down of capacity in China before the
Olympics 2008 and MNCs diversifying their base to India had resulted in the
company’s exports spiking 80% in FY2009 to `295cr. The scenario however
changed post the Olympics and many closed capacities have come on stream and
commodities prices corrected due to which exports declined by 35% in FY2010.
Against this backdrop, we estimate RAIL to post a CAGR of 40% in exports over
FY2010-12.
Contract manufacturing to be next growth driver: RAIL plans to focus on contract
manufacturing (CM) for exports and selectively target and supply to the top
players. To facilitate the same, the company is setting up a new plant at Dahej.
Overall, RAIL targets to achieve cumulative revenues of `1,000cr over the next five
years from this segment alone.
Outlook and Valuation
Given that the monsoons have been normal, industry expects to continue to
register healthy growth in FY2011. With RAIL being a major player in the domestic
market, we expect it to grow at a higher pace than industry. We maintain our
estimates and expect the company to register a CAGR of 24% and 32% in net sales
and profit over FY2010-12, respectively. Post out-performing the Sensex by 102%
over the last one year, at current levels, the stock is trading at fair valuations of
15.7x FY2012E EPS. Hence, we remain Neutral on the stock.
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