At an inflection point - Rallis India :: HDFC Securities

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At an inflection point
Rallis India’s 3QFY15 results were disappointing on
account of lower Rabi sowing (-5% YoY) and weak
profitability for farmers in kharif. Revenues came in
at Rs 3.9bn (-3% YoY) while APAT stood at Rs 255mn
(-16%). Inventory losses (Rs 54mn, due to fall in RM
prices) and higher other expenses led to the
contraction in EBITDA margin to 13% (-91 bps).
RALI is a direct beneficiary of Indian agriculture
growth. Lower penetration of agrochemicals in India
and its cost advantage underpin a long term growth.
A strong brand, complete portfolio and extensive
distribution network command a premium for Rallis.
Despite the world class facility at Dahej, revenues
from exports have only doubled in the last 5 years for
RALI vs ~5x growth for the CSM leader in India. We
expect CSM along with seeds (biz to grow 2.5x over
FY14-17E) to be the key drivers for the company.
RALI is trading at 15.5/3.7x FY17E EPS/BV. Attractive
valuation, zero debt, strong RoE/RoCE and new
product launches are key positives for the stock.
Upgrade to BUY with a TP of Rs 251 (18x FY17E EPS).
3QFY15 Highlights
 Crop protection : Performance was muted led by lower
rabi sowing and weak crop prices in the domestic and
international markets. Company remained focused on
cash collection vs growth. RALI has moved further
ahead in CSM with a new commercial trial order (to be
executed in 4QFY15).
 Seeds : Seeds biz (Metahelix) revenues grew by 55%
YoY to ~Rs 350mn. However, margins were under
pressure and consequently, EBITDA loss increased to Rs
67mn (vs Rs 35mn YoY). Lower paddy acreage in AP
and shift from maize in Bihar led to below expected
performance.
 Robust financials : Healthy OCF with a capex of Rs
1bn/yr will lead to an FCF of ~Rs 1.3bn/yr over FY15-
17E. RoE/RoCE expected to improve to 26/24% by
FY17E from 23/20% in FY14.
 Outlook : RALI will benefit from strong farmer connect,
sound product portfolio & robust financials. Focus on
custom synthesis manufacturing and seeds could
further open up a vast opportunity.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010868