FY15 a washout, long term prospects intact… • Rallis India :: ICICI Securities

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FY15 a washout, long term prospects intact…
• Rallis India reported a subdued Q3FY15 performance. Consolidated
revenues came in at | 389.5 crore, down 2.8% YoY
• Standalone revenues (mainly comprising the domestic crop
protection business) in Q3FY15 came in at | 354.7 crore, down 6.3%
YoY. However, Metahelix (Rallis’ subsidiary) posted robust growth
with Q3FY15 sales coming in at | 34.8 crore, up 55% YoY
• EBITDA for the quarter came in at | 50.5 crore with corresponding
EBITDA margins at 13.0%. PAT in Q3FY15 stood at | 25.5 crore
Challenges faced by Indian agri industry: Opportunity for agro-chemicals
Currently, the domestic agriculture sector is facing a lot of challenges.
This is as an opportunity for the agro chemical industry. Some of the
challenges include (i) constant sowable land: In India, the net sown area
has remained almost constant at ~140 million hectare (ii) fragmented land
holdings: the acreage of land holdings per Indian farmer has reduced
over time (from 1.33 hectare per holding in FY01 to 1.15 hectare per
holding in FY11), thereby leading to challenges over economies of scale
and greater farm mechanisation (iii) mounting crop losses (amounting to
~| 90,000 crore annually) due to non-usage of crop protection chemicals.
Thus, with under-penetration of the crop protection segment and the
government’s thrust on augmenting crop yields, there exists a strong
case for increasing the usage of crop protection chemicals.
Presence across value chain
Rallis is present across the agricultural value chain ranging from hybrid
seeds (through its subsidiary Metahelix) to plant growth nutrients to
organic manure & soil conditioners (through its subsidiary Zero Waste
Agro Organics) to crop protection (agro chemicals). Metahelix
manufactures and markets hybrid seeds with ~60-65% exposure to the
Kharif season. Metahelix’ revenue has grown at a CAGR of 59% in FY12-
14. With a good product profile coupled with a strong R&D set up, we
expect revenues of Metahelix to grow at a CAGR of 26.7% in FY14-17E to
| 457 crore in FY17E (| 225 crore in FY14). Hence, with Metahelix traction
and a strong base business, we expect consolidated revenues to grow at
a CAGR of 14.7% over FY14-17E to | 2604.0 crore in FY17E.
Contract manufacturing; new area of thrust; robust growth outlook
Rallis also has a notable presence in the contract manufacturing segment
wherein it manufactures chemicals and formulations for other reputed
industry players. It is developing its new Dahej SEZ unit for the purpose
of contract manufacturing. In FY14, Rallis clocked a topline of ~| 250
crore from this segment. With the commissioning of the Dahej facility we
expect this segment to grow at a CAGR of 14.5% in FY14-17E.
Lean balance sheet; FY15 a washout year, long term growth story intact
Rallis has a lean balance sheet with minimal leverage and strong return
ratios with FY14 RoCE and RoE at 21% and 28%, respectively. With Kharif
grain production down 7% YoY (pressure on yields), a decline in acreage
for the Rabi season and shift of Rabi crop in Bihar from maize to wheat
(impacting the newly launched maize hybrid seed), FY15E will be a
washout year for the industry, as a whole and Rallis, in particular. Hence,
we have marginally revised downward our estimates. We have revised
downward FY14-17E sales & PAT CAGR to 14.7% & 18.4% from 16.8% &
21.6%, respectively. We have revised our target price to | 276 with a BUY
rating on the stock. We have valued Rallis at 24x P/E on an average FY16E
and FY17E EPS of | 11.5. We believe any correction in the stock price will
be a good opportunity to enter Rallis with a long term investment horizon.

LINK
http://content.icicidirect.com/mailimages/IDirect_RallisIndia_Q3FY15.pdf