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Rallis India Limited
Initiation ; Overweight ;RALL.BO, RALI IN
Ensuring a good harvest
• Initiate with Overweight, price target of Rs1640: Our PT implies potential
upside of 31% from current levels. Rallis is a leading player in the Indian crop
protection market with 13% market share. It also has strong international
operations – it undertakes contract manufacturing for large global players and
also sells its own registered products in Latin America.
• Rallis well positioned to benefit from growing domestic crop protection
market: Crop protection market (pesticides) in India is estimated by the
company to be US$1.1B, growing at 10%-12% per annum driven by rising farm
incomes, increasing focus on productivity and paucity of farm labour. We see
these as sustainable themes, which will continue to drive strong growth for
pesticides in India. Strong brands, fresh product portfolio (~30% of products
less than 3 years old), and a strong distribution network with 1500 dealers and
30,000 retailers across India are driving domestic market share gains for Rallis.
Recently acquired Metahelix Life Sciences will also allow Rallis to scale up
presence in the fast growing seeds market in India.
• Enhanced capacity to address growing international demand: Rallis has set
up a new plant in Dahej which will cater to international markets. Rallis is
seeing strong enquiries from customers for contract manufacturing and 1/3rd of
the plant’s capacity has been tied up. Rallis should also benefit from excise and
tax savings, as the plant is located in a SEZ. We estimate a CAGR for
international business revenue of 31% over FY10-FY13E.
• Solid capital management: Rallis’ capital management is best in class versus
domestic peers (based on FY10 debtor days). It operates with net ‘negative’
working capital and has sustainable free cash flows. We estimate cash on its
balance sheet will rise to Rs800MM by FY13E from Rs119MM in FY10.
• Price target, valuation, key risks: Our PT of Rs1,640 is based on 16x Sep-12
P/E, a 25% premium to domestic peer group. We think the premium is
supported by Rallis’ above par growth, stronger balance sheet and higher capital
efficiency ratios. Key risks include delay in expansion plans, inability to scale
up seeds business, raw material costs and adverse weather.
Investment thesis
We initiate coverage on Rallis with an Overweight rating and Sep-2011 target price
of Rs1640, based on 16x Sep-12E P/E, a 25% premium to local agri-input and crop
protection players. Rallis is one of the leading players in crop protection chemicals
segment in India with 13% market share (Source: Rallis). It has strong international
operations with demand coming from contract manufacturing and own products
registered in various markets. We believe Rallis is well-positioned to benefit from
rising demand for pesticides in India. Rallis is gaining market share in the domestic
market driven by its strong brands, a fresh product portfolio, pan-India distribution
network and solid balance sheet. In addition, we think its international operations are
also poised for strong growth as it enhances capacity to meet rising demand for
contract manufacturing. We forecast earnings CAGR of 31% over FY10-FY13E.
Crop protection market size in India is estimated by the company to be US$1.1B,
growing at 10%-12% per annum driven by rising farm incomes, increasing focus on
productivity and paucity of farm labour. We see these as sustainable themes, which
will continue to drive strong growth for crop production products in India.
We expect sales for Rallis to grow ahead of the market driven by its strong brands,
wide distribution and investments in new product development. At any given time,
new products (less than 3 years old) account for almost 30% of Rallis’ product
portfolio. Strong pipe-line of new products allows Rallis to sustain strong growth and
capture higher realizations. Rallis has a distribution network covering 80% of
districts in India, serviced through 1500 dealers and 30,000 retailers. Recently
acquired Metahelix Life Sciences will allow Rallis to scale up its seeds business
going forward. We expect Rallis domestic revenues to grow at a CAGR of 18% over
FY10-FY13E.
Rallis has recently added manufacturing capacities by setting up a new plant in Dahej
(annual capacity of 5000MT). This plant has been set up in a special economic zone
(SEZ) and will mainly cater to international markets. Rallis is seeing strong enquiries
from customers for contract manufacturing and 1/3
rd
of the capacity of the Dahej
plant has already been tied up. We expect this plant to scale up over the next 1-2
years and drive strong growth for the international business. Rallis should also
benefit from excise and tax savings, given that the plant is located in a SEZ. The
Dahej plant would be exempted from income tax and excise duties for the first 5
years of operations. We forecast a CAGR of 31% over FY10-FY13E for the
international business.
Rallis’ capital management is best in class compared to its local peers, based on
FY10 debtor days. It maintains working capital discipline and operates with net
negative working capital. In addition, it has consistently generated free cash flows
and we expect this trend to continue. We estimate cash on its balance sheet to
increase to Rs800MM by FY13E from Rs119MM in FY10. We forecast EPS CAGR
of 31% over FY10-FY13E.
Positive drivers
Higher productivity, scarce labor driving demand for crop protection products
Rallis is well- positioned to benefit from the increasing usage of pesticides in India,
driven by an attempt to improve farm yields and increasing scarcity of labor in rural
areas. With huge demand mismatch between rising Indian population and food
production, the government has been increasing emphasis on improving productivity.
In addition, rising food inflation is hastening the need for improved agriculture
practices to enhance productivity. According to Dun and Bradstreet, between 25%-
30% of annual crop production is lost to pests, plant pathogens and weeds. India’s
consumption of crop-protection chemicals is at 381gm/Ha, ~25% below the global
average of 500gm/Ha. This is on account of fragmented land holdings, poor levels of
irrigation, dependence on monsoons and low awareness regarding benefits of
pesticide use. We believe Rallis, with its leading position, strong product portfolio
and pan-India distribution network will be a key beneficiary from the increased usage
and rising penetration of pesticides in the country.
Another concern facing farmers in rural areas over the last few years has been
scarcity of farm labor, driven by the implementation of NREGA (National Rural
Employment Guarantee Act) which provides employment at a fixed wage rate in
rural and semi-urban areas. This is forcing farmers to find alternatives to manual
labor. Farmers are increasingly using herbicides (weedicides) to remove weeds,
which has traditionally been done manually. With strong brand and product portfolio,
we think Rallis is well placed to benefit from the rising demand for herbicides.
Strong brand recall, fresher product portfolio and pan-India distribution
network driving domestic demand
Rallis derived 70% of its FY10 revenues from domestic operations, mostly through
sale of pesticides. It has the second largest market share in India at around 13% with
the largest range of products in the market. (Source:Rallis) To penetrate further and
improve its market share, Rallis has been following a differentiated strategy to
market and promote its products. It has invested significantly in brand building using
menmonics, slogan designs and colour schemes. It has also innovatively enhanced
visibility of its products by packing it in differentiated shapes and colours schemes,
thereby enhancing brand profile and visibility.
Rallis also has a strong R&D team which focuses on innovation of new products
with enhanced features. It continuously refreshes its product portfolio and most of its
products have a shelf life of only 4 years. New products come either from own stable
or through its global alliance partners. Rallis has over 100 new products at present in
various stages of development at its R&D centre in Bangalore. Currently, ~30% of
domestic revenues come from new products less than 3 years old. New products
provide better margins than existing products thereby enhancing Rallis’ earnings.
Rallis has very strong distribution network covering 80% of India’s districts, and
more than 1500 dealers and 30,000 retailers across India. Rallis also has very strong
farmer relationship network called “Rallis Kisan Kutumba” through which it engages
farmers by conducting seminars, demos, training programmes and offers advisory
services. Rallis currently covers 0.5MM farmers under this network and intends to
scale it up to 1MM farmers by FY12E. Strong farmer relationships bode well for its
growth prospects.
Foray into seeds business enhances growth opportunity
Rallis recently acquired 53.5% stake in Metahelix Life Sciences (a seeds company)
for Rs0.96B. It has the option to buy another 5.52% stake in next year for Rs0.3B
and increase it to 100% over the next five years. Metahelix Life Sciences has a seeds
portfolio covering rice, maize, millets and vegetable seeds. We believe that
Metahelix provides RALI with a strong platform comprising breeding, production
and marketing of seeds. It has a pan-India presence through its brand 'Dhaanya
Seeds' sold through ~1000 distributors. Presently, Metahelix has presence
predominantly in hybrid seeds and is the first Indian company to have a proprietary
Bt cotton trait, which it plans to launch in the current year. Bt Cotton seed is ~Rs20B
market in India catered for mostly by Monsanto. Prices of these seeds are fixed at
Rs650 (for Bollgard-1) and Rs750 (for Bollgard-2) in various states. Metahelix may
have a competitive advantage as it claims to develop the Bt. Cotton seeds at 1/4th of
cost of Monsanto. In a volume driven market, sales (and market share) are highly
sensitive to end prices. Metahelix is targeting a market share of 10% over next 3-4
years.
Metahelix acquisition is inline with RALI’s long term growth plans (called “Rallis
Poised"), which has expansion in seeds business as one of the core focus areas. The
acquisition would enhance RALI’s product portfolio through entry into the fast
growing seeds market in India. According to RALI management, Metahelix would
supplement its dealer distribution network and provide a strong R&D team.
Management indicated that they have identified 5-6 products in different seed
categories which they plan to distribute from FY12 onwards. We expect cumulative
revenues of Rs2.2B from Metahelix over FY11E-FY13E.
International demand driven by strong relationships, capacity expansion
Rallis is associated with leading companies worldwide in the agrochemicals business
for contract manufacture of technical grades/ formulations and intermediaries. Over
the years, it has built strong relationships with some of the large players and enjoys
exclusive manufacturer status for some of their molecule manufacturing. These
contracts are typically for a five year term and are on “take or pay” basis,
significantly reducing the risk for Rallis resulting from non-offtake due to adverse
weather conditions. Rallis recently started operations at its new plant in Ankleshwar,
which will manufacture metconazole (herbicide for rape-seed, wheat, oilseed, fruits
and vegetables) exclusively for Kureha Corporation –Japanese based chemicals
player. Rallis has recently enhanced capacity at this plant and expects incremental
annual revenues of Rs0.8B in couple of years when plant operates at full capacity.
Rallis has also set up a 5,000MT per annum plant in Dahej over 3 phases with 1st
phase operational from 1QFY12 onwards. 1/3rd of this capacity is expected to cater
to contract manufacturing. We expect contract sales to grow at a CAGR of 42% over
FY10-FY13E.
Besides contract manufacturing, Rallis exports its registered pesticide products to
international markets. 2/3rds of new capacity coming up at Dahej plant would cater
to own product sales outside India. This new plant with its state of art technology and
infrastructure is expected to strengthen the product offering. With strong brand name
and expansion of distribution channels through Tata Chemicals international
network, we expect Rallis to show strong growth in this segment. We expect
registered product revenues to increase at a CAGR of 37% over FY10-FY13E
including revenues from Dahej plant.
Looking to enhance ‘green’ product portfolio
One key differentiator for Rallis vs. peers is composition of its products. Regulations
regarding the use of toxic (or Red) pesticides are getting stringent across the globe.
Developed countries like US and Europe have been proactive in banning some of the
pesticides with known long term harmful effects. Over the years, Rallis has moved
its product portfolio from mostly toxic product to safer products. Safer (or Green)
pesticides have lesser residue levels, use water in place of petroleum based solvents
and are safer and easier to use. With continuing adverse regulation environment
regarding the use of toxic products, Rallis continues to bring down the percentage of
its toxic products further.
Solid Balance sheet with net negative working capital
Rallis has a solid balance sheet with a net negative working capital cycle. Rallis has
been disciplined about its distribution and receivables and has been willing to forego
sales growth for efficient capital management. We believe that this strategy bodes
well over the long term, and while Rallis may have sacrificed some market share at
the margin, its capital management is best in class compared to its peers based on
FY10 debtor days. Rallis sells its products mostly on cash terms to its domestic
distributors and has average debtors days as low as 6-7 days. For its export business
(currently <30% of business), it has debtor days of 70-80 days. To keep the working
capital cycle to bare minimum, it demands higher credit period from its suppliers
compared to its inventory holding days. This ensures a net negative working capital
and frees up cash to be utilized for expansion. Going forward, we expect Rallis to
maintain a low working capital cycle as it continues to work on distributional
efficiencies and manage its inventory/payables days.
Key risks to our rating and target price
Delay in expansion plans
Rallis is setting up a 5000MT plant in Dahej and expanding its plant in Ankleshwar.
Setting up of Dahej has been delayed to 1QFY12 (earlier 2QFY11) due to excessive
rains at the site. Any further delay commissioning of Dahej plant would have an
adverse impact on our earnings estimates.
Inability to scale up newly acquired seeds business
Rallis has recently acquired Metahelix Life Sciences to expand its presence in seeds
business. Management has indicated that it expects this business to generate
cumulative revenues of Rs10B over the next five years from current annual revenues
of Rs0.7B (JPM estimate) implying a revenue CAGR of ~30%. Inability to scale up
revenues from the seeds business could impact our revenue and earnings estimates.
Aggressive expansion through acquisitions
Rallis management has indicated that they plan to grow inorganically in agri input
areas of seeds, plant nutrients, agricultural services, etc. Historically, Rallis
management has been prudent in making acquisitions in related areas and where
synergies are easily identified. Any change in management strategy to expand
aggressively through acquisitions in either related or non-core could impact the
sentiment on stock valuations.
Inability to pass through rise in raw material prices
Raw Materials account for 61% of total costs for Rallis. Historically, Rallis has been
able to pass on hikes in raw material prices to its end consumers. However, any sharp
hikes in prices of pesticides may result in decline in usage, adversely impacting the
demand. Any sharp increase in raw material prices and the subsequent inability of
Rallis to pass it on constitute a risk to our earnings estimates.
Adverse weather conditions
Rallis business depends heavily on weather conditions. Good monsoons in the
country enable increased area under cultivation. This, in turn, ensures good demand
for Rallis products. Delay in monsoons or uneven weather conditions could affect the
demand for Rallis products and adversely impact its revenues. Adverse weather
conditions in Rallis’ key international markets also impact its business.
Valuation and share price analysis
Rallis currently trades at 14.1x FY12E P/E, at a premium of 10% to its peer group
average of 12.5x. Over the last three years, Rallis has traded at average one-year
forward PE of 12x and at an average discount of 30% to India MSCI forward P/E.
However, the stock has re-rated recently with the stock trading at a 1-year forward
P/E of 16x over the last 12 months. The re-rating in the stock has been driven by
strong operating performance and scaling up of the business. We expect Rallis to
sustain its current trading multiples given its strong earnings growth and improving
capital efficiency ratios.
We have benchmarked our target valuation at 25% premium to domestic agri input
and crop protection players. We believe the premium is justified on the back of
Rallis’ relatively strong positioning, superior earnings growth (3-year EPS CAGR of
31%), strong balance sheet (net cash and negative working capital) and relatively
superior capital efficiency. Our Sep-11 price target of Rs1640 is based on 16x P/E
the average of FY12E and FY13E EPS.
Peer comparables
Relative to Indian agri input and crop protection players, Rallis India is trading at a
premium of 12% on FY11E P/E and FY12E P/E. On EV/EBITDA basis, Rallis is
trading at a premium of 19% and 4% on FY11E and FY12E EV/EBITDA
respectively. Historically (over last 5 years), the stock has traded at a discount to
agri-input peers due to lower margins, and lower scale of business. However, over
last 12 months, stock has started trading at a premium of 20% -25% to peer group.
Relative to global crop protection players, Rallis India is trading at a discount of 7%
and 15% on FY11E P/E and FY12E P/E respectively.
Company description
Rallis India Limited, a Tata group company, is a subsidiary of Tata Chemicals,
which holds 50.7% stake in the company. It is primarily engaged in the manufacture
and sale of pesticides in domestic and international markets. It also manufactures
plant growth nutrients, specialty fertilizers, seeds and leather tanning materials. The
company has 5 factories located across the country with the 6th one coming up in
Dahej SEZ from this year. Rallis has very strong distribution network covering 80%
of India’s districts, and more than 1500 dealers and 30,000 retailers across India.
Rallis India categorizes its business into following key areas:
Agri Business Domestic: Under this area, Rallis manufactures and markets
Pesticides, Seeds, Fertilisers, household products and Seed treatment chemicals:
Pesticides: This is the largest division of Rallis India with c.68% of FY10 revenues
coming from this segment. Rallis India has the largest capacity in India for
manufacture of pesticides, annually producing 10,000MT of technical grade pesticide
and 30,000T/L of formulations. According to management, it has the second largest
market share in India at around 13% with the largest number of products in the
market (59). Rallis follows a unique strategy to penetrate the rural market – sells its
products in different shapes (rocket) attracting attention and under localised Indian
names (Fateh, Reeva, Manik, Daksh).
Seeds: Rallis produces and markets several hybrids/research varieties of maize,
paddy and cotton. It is one of the major seed companies in the domestic market. For
FY10, seeds contributed 1% of group revenues. Rallis recently acquired Metahelix
Life Sciences, a seeds company for Rs0.96B for a 53.5% stake. Metahelix Life
Sciences boasts of a good product portfolio in rice, maize, millets and vegetable
seeds. Metahelix provides RALI with a strong platform comprising breeding,
production and marketing of seeds.
Fertilisers: Rallis markets water soluble specialty fertilisers suited for foliar spray
and fertigation through micro irrigation. Rallis imports these fertilisers from major
international manufacturers including Yara and Borax Europe. For FY10, Plant
growth nutrients contributed 1% of group revenues.
Household products: Rallis manufactures and markets termiciticide (to control
termites), insecticides for public health and household use and Rallis Gel for
cockroach controls.
Seed treatment chemicals: Rallis manufactures and markets insecticides and
fungicides for control of sucking pests and other seed related diseases.
International business is classified under following areas:
Institutional Business: Under this business area, Rallis India provides pesticides
technicals and bulk of various molecules to leading companies like Bayer, Syngenta,
Excel, UPL, Gharda, Cheminova and other agrochemical manufacturers. For FY10,
Institutional business contributed 10% of group revenues
International Registered products Business: Rallis sells its registered pesticide
products in international markets. For FY10, International business contributed 10%
of group revenues.
Contract Areas: Rallis is associated with leading companies in the agrochemicals
business for contract manufacture of technical grades/ formulations and
intermediaries. Recently, Rallis has been expanding capacity through new plants at
Ankleshwar and Dahej to serve international customers through contract
manufacturing. For FY10, Contract business contributed 10% of group revenues.
Management
Rallis is a Tata group company chaired by R Gopalakrishnan, ED of Tata Sons. Dayto- day operations managed by Mr. V Shankar, MD and CEO, Mr. Girish Nadkarni,
Executive VP and CFO and Mr. A K Shetty, COO Agri business. Currently, Rallis
board has 5 independent directors out of board of 10.
Shareholding trend
As of December 30, 2010, shareholding of the parent company (Tata Chemicals) was
50.7%. Over last two years, FIIs holding has grown by over 80bps to 3.2% at end of
December 2010.
Financial Analysis
Earnings CAGR of 31% over FY10-FY13E
We forecast earnings CAGR of 31% over FY10-FY13E. We expect earnings growth
to be driven by 22% CAGR in revenues and a 190bps expansion in EBITDA margins
over the same period.
Revenue growth CAGR 22% over FY10-FY13E, 190bps EBITDA margin
expansion
We expect strong revenue growth (CAGR of 22% over FY10-FY13E) driven by both
domestic and international operations. Domestic revenues are expected to grow at
18% CAGR on back of introduction of new products in pesticides and expansion of
seeds business through recently acquired Metahelix Life Sciences. Revenues from
international pesticide operations are expected to grow at CAGR of 31% as new
plants at Ankleshwar and Dahej scale up over next two years. We expect margin
expansion on back of increasing proportion of international operations (which have
higher margins vs. domestic operations) as well as some cost savings resulting from
“DISHA initiatives”. Our Key operating assumptions are enumerated in the table
over.
Strong operating cash flows to fund capital expenditure and growth
Rallis is spending Rs1.5B on its Dahej plant and Rs0.8B on expanding its
Ankleshwar plant. In addition, it has recently acquired a 53.5% stake in Metahelix
Life Sciences for Rs1.0B with commitment to buy another 5.52% stake at Rs250MM
in the next year. Introduction of new products would incur registration costs of
Rs50MM per product per market. Overall, we expect Rallis to incur cumulative
capital expenditure of Rs2.6B over FY11E-FY13E. We believe Rallis should
generate sufficient cash flows (Rs5.2B operating cash flow over FY11E-FY13E) to
fund these capex requirements. Rallis had net cash of Rs119MM at end of FY10,
which we expect to increase to Rs800MM by FY13E.
Working capital to continue to remain negative going forward
The pesticides industry is working capital intensive due to the seasonal nature of
demand requiring high levels of inventory as well as long credit periods to be made
available to farmers. Over past few years, Rallis has focused on reducing its working
capital requirement through inventory management and by offering better pricing to
distributors to pay upfront. As a result, it has been able to significantly bring down its
inventory and debtor days. Rallis operates on net negative working capital and we
expect working capital requirements to remain at relatively low levels going forward.
We forecast that cash flows generated from working capital will switch from positive
to negative between FY11E and FY12E – this is primarily due to growth in
international revenues, which typically have longer receivables days. We forecast the
net working capital days to rise from -14 days in FY10 to -4 days in FY13E – at
which point the company would still be running slightly net negative working
capital, but the annual change up to that point would result in negative cash flows
from working capital in FY12E and 13E.
Capital efficiency to improve as earnings pick up
We expect ROCE to improve to 31.8% in FY13E (from 23.9% in FY10) and ROE to
31.9% in FY13E from 26.2% in FY10 driven by strong growth in earnings. We note
that net of cash, ROCE improves from 24.5% in FY10 to 34.6% by FY13E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rallis India Limited
Initiation ; Overweight ;RALL.BO, RALI IN
Ensuring a good harvest
• Initiate with Overweight, price target of Rs1640: Our PT implies potential
upside of 31% from current levels. Rallis is a leading player in the Indian crop
protection market with 13% market share. It also has strong international
operations – it undertakes contract manufacturing for large global players and
also sells its own registered products in Latin America.
• Rallis well positioned to benefit from growing domestic crop protection
market: Crop protection market (pesticides) in India is estimated by the
company to be US$1.1B, growing at 10%-12% per annum driven by rising farm
incomes, increasing focus on productivity and paucity of farm labour. We see
these as sustainable themes, which will continue to drive strong growth for
pesticides in India. Strong brands, fresh product portfolio (~30% of products
less than 3 years old), and a strong distribution network with 1500 dealers and
30,000 retailers across India are driving domestic market share gains for Rallis.
Recently acquired Metahelix Life Sciences will also allow Rallis to scale up
presence in the fast growing seeds market in India.
• Enhanced capacity to address growing international demand: Rallis has set
up a new plant in Dahej which will cater to international markets. Rallis is
seeing strong enquiries from customers for contract manufacturing and 1/3rd of
the plant’s capacity has been tied up. Rallis should also benefit from excise and
tax savings, as the plant is located in a SEZ. We estimate a CAGR for
international business revenue of 31% over FY10-FY13E.
• Solid capital management: Rallis’ capital management is best in class versus
domestic peers (based on FY10 debtor days). It operates with net ‘negative’
working capital and has sustainable free cash flows. We estimate cash on its
balance sheet will rise to Rs800MM by FY13E from Rs119MM in FY10.
• Price target, valuation, key risks: Our PT of Rs1,640 is based on 16x Sep-12
P/E, a 25% premium to domestic peer group. We think the premium is
supported by Rallis’ above par growth, stronger balance sheet and higher capital
efficiency ratios. Key risks include delay in expansion plans, inability to scale
up seeds business, raw material costs and adverse weather.
Investment thesis
We initiate coverage on Rallis with an Overweight rating and Sep-2011 target price
of Rs1640, based on 16x Sep-12E P/E, a 25% premium to local agri-input and crop
protection players. Rallis is one of the leading players in crop protection chemicals
segment in India with 13% market share (Source: Rallis). It has strong international
operations with demand coming from contract manufacturing and own products
registered in various markets. We believe Rallis is well-positioned to benefit from
rising demand for pesticides in India. Rallis is gaining market share in the domestic
market driven by its strong brands, a fresh product portfolio, pan-India distribution
network and solid balance sheet. In addition, we think its international operations are
also poised for strong growth as it enhances capacity to meet rising demand for
contract manufacturing. We forecast earnings CAGR of 31% over FY10-FY13E.
Crop protection market size in India is estimated by the company to be US$1.1B,
growing at 10%-12% per annum driven by rising farm incomes, increasing focus on
productivity and paucity of farm labour. We see these as sustainable themes, which
will continue to drive strong growth for crop production products in India.
We expect sales for Rallis to grow ahead of the market driven by its strong brands,
wide distribution and investments in new product development. At any given time,
new products (less than 3 years old) account for almost 30% of Rallis’ product
portfolio. Strong pipe-line of new products allows Rallis to sustain strong growth and
capture higher realizations. Rallis has a distribution network covering 80% of
districts in India, serviced through 1500 dealers and 30,000 retailers. Recently
acquired Metahelix Life Sciences will allow Rallis to scale up its seeds business
going forward. We expect Rallis domestic revenues to grow at a CAGR of 18% over
FY10-FY13E.
Rallis has recently added manufacturing capacities by setting up a new plant in Dahej
(annual capacity of 5000MT). This plant has been set up in a special economic zone
(SEZ) and will mainly cater to international markets. Rallis is seeing strong enquiries
from customers for contract manufacturing and 1/3
rd
of the capacity of the Dahej
plant has already been tied up. We expect this plant to scale up over the next 1-2
years and drive strong growth for the international business. Rallis should also
benefit from excise and tax savings, given that the plant is located in a SEZ. The
Dahej plant would be exempted from income tax and excise duties for the first 5
years of operations. We forecast a CAGR of 31% over FY10-FY13E for the
international business.
Rallis’ capital management is best in class compared to its local peers, based on
FY10 debtor days. It maintains working capital discipline and operates with net
negative working capital. In addition, it has consistently generated free cash flows
and we expect this trend to continue. We estimate cash on its balance sheet to
increase to Rs800MM by FY13E from Rs119MM in FY10. We forecast EPS CAGR
of 31% over FY10-FY13E.
Positive drivers
Higher productivity, scarce labor driving demand for crop protection products
Rallis is well- positioned to benefit from the increasing usage of pesticides in India,
driven by an attempt to improve farm yields and increasing scarcity of labor in rural
areas. With huge demand mismatch between rising Indian population and food
production, the government has been increasing emphasis on improving productivity.
In addition, rising food inflation is hastening the need for improved agriculture
practices to enhance productivity. According to Dun and Bradstreet, between 25%-
30% of annual crop production is lost to pests, plant pathogens and weeds. India’s
consumption of crop-protection chemicals is at 381gm/Ha, ~25% below the global
average of 500gm/Ha. This is on account of fragmented land holdings, poor levels of
irrigation, dependence on monsoons and low awareness regarding benefits of
pesticide use. We believe Rallis, with its leading position, strong product portfolio
and pan-India distribution network will be a key beneficiary from the increased usage
and rising penetration of pesticides in the country.
Another concern facing farmers in rural areas over the last few years has been
scarcity of farm labor, driven by the implementation of NREGA (National Rural
Employment Guarantee Act) which provides employment at a fixed wage rate in
rural and semi-urban areas. This is forcing farmers to find alternatives to manual
labor. Farmers are increasingly using herbicides (weedicides) to remove weeds,
which has traditionally been done manually. With strong brand and product portfolio,
we think Rallis is well placed to benefit from the rising demand for herbicides.
Strong brand recall, fresher product portfolio and pan-India distribution
network driving domestic demand
Rallis derived 70% of its FY10 revenues from domestic operations, mostly through
sale of pesticides. It has the second largest market share in India at around 13% with
the largest range of products in the market. (Source:Rallis) To penetrate further and
improve its market share, Rallis has been following a differentiated strategy to
market and promote its products. It has invested significantly in brand building using
menmonics, slogan designs and colour schemes. It has also innovatively enhanced
visibility of its products by packing it in differentiated shapes and colours schemes,
thereby enhancing brand profile and visibility.
Rallis also has a strong R&D team which focuses on innovation of new products
with enhanced features. It continuously refreshes its product portfolio and most of its
products have a shelf life of only 4 years. New products come either from own stable
or through its global alliance partners. Rallis has over 100 new products at present in
various stages of development at its R&D centre in Bangalore. Currently, ~30% of
domestic revenues come from new products less than 3 years old. New products
provide better margins than existing products thereby enhancing Rallis’ earnings.
Rallis has very strong distribution network covering 80% of India’s districts, and
more than 1500 dealers and 30,000 retailers across India. Rallis also has very strong
farmer relationship network called “Rallis Kisan Kutumba” through which it engages
farmers by conducting seminars, demos, training programmes and offers advisory
services. Rallis currently covers 0.5MM farmers under this network and intends to
scale it up to 1MM farmers by FY12E. Strong farmer relationships bode well for its
growth prospects.
Foray into seeds business enhances growth opportunity
Rallis recently acquired 53.5% stake in Metahelix Life Sciences (a seeds company)
for Rs0.96B. It has the option to buy another 5.52% stake in next year for Rs0.3B
and increase it to 100% over the next five years. Metahelix Life Sciences has a seeds
portfolio covering rice, maize, millets and vegetable seeds. We believe that
Metahelix provides RALI with a strong platform comprising breeding, production
and marketing of seeds. It has a pan-India presence through its brand 'Dhaanya
Seeds' sold through ~1000 distributors. Presently, Metahelix has presence
predominantly in hybrid seeds and is the first Indian company to have a proprietary
Bt cotton trait, which it plans to launch in the current year. Bt Cotton seed is ~Rs20B
market in India catered for mostly by Monsanto. Prices of these seeds are fixed at
Rs650 (for Bollgard-1) and Rs750 (for Bollgard-2) in various states. Metahelix may
have a competitive advantage as it claims to develop the Bt. Cotton seeds at 1/4th of
cost of Monsanto. In a volume driven market, sales (and market share) are highly
sensitive to end prices. Metahelix is targeting a market share of 10% over next 3-4
years.
Metahelix acquisition is inline with RALI’s long term growth plans (called “Rallis
Poised"), which has expansion in seeds business as one of the core focus areas. The
acquisition would enhance RALI’s product portfolio through entry into the fast
growing seeds market in India. According to RALI management, Metahelix would
supplement its dealer distribution network and provide a strong R&D team.
Management indicated that they have identified 5-6 products in different seed
categories which they plan to distribute from FY12 onwards. We expect cumulative
revenues of Rs2.2B from Metahelix over FY11E-FY13E.
International demand driven by strong relationships, capacity expansion
Rallis is associated with leading companies worldwide in the agrochemicals business
for contract manufacture of technical grades/ formulations and intermediaries. Over
the years, it has built strong relationships with some of the large players and enjoys
exclusive manufacturer status for some of their molecule manufacturing. These
contracts are typically for a five year term and are on “take or pay” basis,
significantly reducing the risk for Rallis resulting from non-offtake due to adverse
weather conditions. Rallis recently started operations at its new plant in Ankleshwar,
which will manufacture metconazole (herbicide for rape-seed, wheat, oilseed, fruits
and vegetables) exclusively for Kureha Corporation –Japanese based chemicals
player. Rallis has recently enhanced capacity at this plant and expects incremental
annual revenues of Rs0.8B in couple of years when plant operates at full capacity.
Rallis has also set up a 5,000MT per annum plant in Dahej over 3 phases with 1st
phase operational from 1QFY12 onwards. 1/3rd of this capacity is expected to cater
to contract manufacturing. We expect contract sales to grow at a CAGR of 42% over
FY10-FY13E.
Besides contract manufacturing, Rallis exports its registered pesticide products to
international markets. 2/3rds of new capacity coming up at Dahej plant would cater
to own product sales outside India. This new plant with its state of art technology and
infrastructure is expected to strengthen the product offering. With strong brand name
and expansion of distribution channels through Tata Chemicals international
network, we expect Rallis to show strong growth in this segment. We expect
registered product revenues to increase at a CAGR of 37% over FY10-FY13E
including revenues from Dahej plant.
Looking to enhance ‘green’ product portfolio
One key differentiator for Rallis vs. peers is composition of its products. Regulations
regarding the use of toxic (or Red) pesticides are getting stringent across the globe.
Developed countries like US and Europe have been proactive in banning some of the
pesticides with known long term harmful effects. Over the years, Rallis has moved
its product portfolio from mostly toxic product to safer products. Safer (or Green)
pesticides have lesser residue levels, use water in place of petroleum based solvents
and are safer and easier to use. With continuing adverse regulation environment
regarding the use of toxic products, Rallis continues to bring down the percentage of
its toxic products further.
Solid Balance sheet with net negative working capital
Rallis has a solid balance sheet with a net negative working capital cycle. Rallis has
been disciplined about its distribution and receivables and has been willing to forego
sales growth for efficient capital management. We believe that this strategy bodes
well over the long term, and while Rallis may have sacrificed some market share at
the margin, its capital management is best in class compared to its peers based on
FY10 debtor days. Rallis sells its products mostly on cash terms to its domestic
distributors and has average debtors days as low as 6-7 days. For its export business
(currently <30% of business), it has debtor days of 70-80 days. To keep the working
capital cycle to bare minimum, it demands higher credit period from its suppliers
compared to its inventory holding days. This ensures a net negative working capital
and frees up cash to be utilized for expansion. Going forward, we expect Rallis to
maintain a low working capital cycle as it continues to work on distributional
efficiencies and manage its inventory/payables days.
Key risks to our rating and target price
Delay in expansion plans
Rallis is setting up a 5000MT plant in Dahej and expanding its plant in Ankleshwar.
Setting up of Dahej has been delayed to 1QFY12 (earlier 2QFY11) due to excessive
rains at the site. Any further delay commissioning of Dahej plant would have an
adverse impact on our earnings estimates.
Inability to scale up newly acquired seeds business
Rallis has recently acquired Metahelix Life Sciences to expand its presence in seeds
business. Management has indicated that it expects this business to generate
cumulative revenues of Rs10B over the next five years from current annual revenues
of Rs0.7B (JPM estimate) implying a revenue CAGR of ~30%. Inability to scale up
revenues from the seeds business could impact our revenue and earnings estimates.
Aggressive expansion through acquisitions
Rallis management has indicated that they plan to grow inorganically in agri input
areas of seeds, plant nutrients, agricultural services, etc. Historically, Rallis
management has been prudent in making acquisitions in related areas and where
synergies are easily identified. Any change in management strategy to expand
aggressively through acquisitions in either related or non-core could impact the
sentiment on stock valuations.
Inability to pass through rise in raw material prices
Raw Materials account for 61% of total costs for Rallis. Historically, Rallis has been
able to pass on hikes in raw material prices to its end consumers. However, any sharp
hikes in prices of pesticides may result in decline in usage, adversely impacting the
demand. Any sharp increase in raw material prices and the subsequent inability of
Rallis to pass it on constitute a risk to our earnings estimates.
Adverse weather conditions
Rallis business depends heavily on weather conditions. Good monsoons in the
country enable increased area under cultivation. This, in turn, ensures good demand
for Rallis products. Delay in monsoons or uneven weather conditions could affect the
demand for Rallis products and adversely impact its revenues. Adverse weather
conditions in Rallis’ key international markets also impact its business.
Valuation and share price analysis
Rallis currently trades at 14.1x FY12E P/E, at a premium of 10% to its peer group
average of 12.5x. Over the last three years, Rallis has traded at average one-year
forward PE of 12x and at an average discount of 30% to India MSCI forward P/E.
However, the stock has re-rated recently with the stock trading at a 1-year forward
P/E of 16x over the last 12 months. The re-rating in the stock has been driven by
strong operating performance and scaling up of the business. We expect Rallis to
sustain its current trading multiples given its strong earnings growth and improving
capital efficiency ratios.
We have benchmarked our target valuation at 25% premium to domestic agri input
and crop protection players. We believe the premium is justified on the back of
Rallis’ relatively strong positioning, superior earnings growth (3-year EPS CAGR of
31%), strong balance sheet (net cash and negative working capital) and relatively
superior capital efficiency. Our Sep-11 price target of Rs1640 is based on 16x P/E
the average of FY12E and FY13E EPS.
Peer comparables
Relative to Indian agri input and crop protection players, Rallis India is trading at a
premium of 12% on FY11E P/E and FY12E P/E. On EV/EBITDA basis, Rallis is
trading at a premium of 19% and 4% on FY11E and FY12E EV/EBITDA
respectively. Historically (over last 5 years), the stock has traded at a discount to
agri-input peers due to lower margins, and lower scale of business. However, over
last 12 months, stock has started trading at a premium of 20% -25% to peer group.
Relative to global crop protection players, Rallis India is trading at a discount of 7%
and 15% on FY11E P/E and FY12E P/E respectively.
Company description
Rallis India Limited, a Tata group company, is a subsidiary of Tata Chemicals,
which holds 50.7% stake in the company. It is primarily engaged in the manufacture
and sale of pesticides in domestic and international markets. It also manufactures
plant growth nutrients, specialty fertilizers, seeds and leather tanning materials. The
company has 5 factories located across the country with the 6th one coming up in
Dahej SEZ from this year. Rallis has very strong distribution network covering 80%
of India’s districts, and more than 1500 dealers and 30,000 retailers across India.
Rallis India categorizes its business into following key areas:
Agri Business Domestic: Under this area, Rallis manufactures and markets
Pesticides, Seeds, Fertilisers, household products and Seed treatment chemicals:
Pesticides: This is the largest division of Rallis India with c.68% of FY10 revenues
coming from this segment. Rallis India has the largest capacity in India for
manufacture of pesticides, annually producing 10,000MT of technical grade pesticide
and 30,000T/L of formulations. According to management, it has the second largest
market share in India at around 13% with the largest number of products in the
market (59). Rallis follows a unique strategy to penetrate the rural market – sells its
products in different shapes (rocket) attracting attention and under localised Indian
names (Fateh, Reeva, Manik, Daksh).
Seeds: Rallis produces and markets several hybrids/research varieties of maize,
paddy and cotton. It is one of the major seed companies in the domestic market. For
FY10, seeds contributed 1% of group revenues. Rallis recently acquired Metahelix
Life Sciences, a seeds company for Rs0.96B for a 53.5% stake. Metahelix Life
Sciences boasts of a good product portfolio in rice, maize, millets and vegetable
seeds. Metahelix provides RALI with a strong platform comprising breeding,
production and marketing of seeds.
Fertilisers: Rallis markets water soluble specialty fertilisers suited for foliar spray
and fertigation through micro irrigation. Rallis imports these fertilisers from major
international manufacturers including Yara and Borax Europe. For FY10, Plant
growth nutrients contributed 1% of group revenues.
Household products: Rallis manufactures and markets termiciticide (to control
termites), insecticides for public health and household use and Rallis Gel for
cockroach controls.
Seed treatment chemicals: Rallis manufactures and markets insecticides and
fungicides for control of sucking pests and other seed related diseases.
International business is classified under following areas:
Institutional Business: Under this business area, Rallis India provides pesticides
technicals and bulk of various molecules to leading companies like Bayer, Syngenta,
Excel, UPL, Gharda, Cheminova and other agrochemical manufacturers. For FY10,
Institutional business contributed 10% of group revenues
International Registered products Business: Rallis sells its registered pesticide
products in international markets. For FY10, International business contributed 10%
of group revenues.
Contract Areas: Rallis is associated with leading companies in the agrochemicals
business for contract manufacture of technical grades/ formulations and
intermediaries. Recently, Rallis has been expanding capacity through new plants at
Ankleshwar and Dahej to serve international customers through contract
manufacturing. For FY10, Contract business contributed 10% of group revenues.
Management
Rallis is a Tata group company chaired by R Gopalakrishnan, ED of Tata Sons. Dayto- day operations managed by Mr. V Shankar, MD and CEO, Mr. Girish Nadkarni,
Executive VP and CFO and Mr. A K Shetty, COO Agri business. Currently, Rallis
board has 5 independent directors out of board of 10.
Shareholding trend
As of December 30, 2010, shareholding of the parent company (Tata Chemicals) was
50.7%. Over last two years, FIIs holding has grown by over 80bps to 3.2% at end of
December 2010.
Financial Analysis
Earnings CAGR of 31% over FY10-FY13E
We forecast earnings CAGR of 31% over FY10-FY13E. We expect earnings growth
to be driven by 22% CAGR in revenues and a 190bps expansion in EBITDA margins
over the same period.
Revenue growth CAGR 22% over FY10-FY13E, 190bps EBITDA margin
expansion
We expect strong revenue growth (CAGR of 22% over FY10-FY13E) driven by both
domestic and international operations. Domestic revenues are expected to grow at
18% CAGR on back of introduction of new products in pesticides and expansion of
seeds business through recently acquired Metahelix Life Sciences. Revenues from
international pesticide operations are expected to grow at CAGR of 31% as new
plants at Ankleshwar and Dahej scale up over next two years. We expect margin
expansion on back of increasing proportion of international operations (which have
higher margins vs. domestic operations) as well as some cost savings resulting from
“DISHA initiatives”. Our Key operating assumptions are enumerated in the table
over.
Strong operating cash flows to fund capital expenditure and growth
Rallis is spending Rs1.5B on its Dahej plant and Rs0.8B on expanding its
Ankleshwar plant. In addition, it has recently acquired a 53.5% stake in Metahelix
Life Sciences for Rs1.0B with commitment to buy another 5.52% stake at Rs250MM
in the next year. Introduction of new products would incur registration costs of
Rs50MM per product per market. Overall, we expect Rallis to incur cumulative
capital expenditure of Rs2.6B over FY11E-FY13E. We believe Rallis should
generate sufficient cash flows (Rs5.2B operating cash flow over FY11E-FY13E) to
fund these capex requirements. Rallis had net cash of Rs119MM at end of FY10,
which we expect to increase to Rs800MM by FY13E.
Working capital to continue to remain negative going forward
The pesticides industry is working capital intensive due to the seasonal nature of
demand requiring high levels of inventory as well as long credit periods to be made
available to farmers. Over past few years, Rallis has focused on reducing its working
capital requirement through inventory management and by offering better pricing to
distributors to pay upfront. As a result, it has been able to significantly bring down its
inventory and debtor days. Rallis operates on net negative working capital and we
expect working capital requirements to remain at relatively low levels going forward.
We forecast that cash flows generated from working capital will switch from positive
to negative between FY11E and FY12E – this is primarily due to growth in
international revenues, which typically have longer receivables days. We forecast the
net working capital days to rise from -14 days in FY10 to -4 days in FY13E – at
which point the company would still be running slightly net negative working
capital, but the annual change up to that point would result in negative cash flows
from working capital in FY12E and 13E.
Capital efficiency to improve as earnings pick up
We expect ROCE to improve to 31.8% in FY13E (from 23.9% in FY10) and ROE to
31.9% in FY13E from 26.2% in FY10 driven by strong growth in earnings. We note
that net of cash, ROCE improves from 24.5% in FY10 to 34.6% by FY13E.
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