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Rallis India - Company Update - Margin pressure likely to persist in near term..!! - Upgrade to 'BUY'

Posted On: 2022-06-30 21:58:58 (Time Zone: IST)

Mr. Himanshu Binani - Research Analyst at Prabhudas Lilladher Pvt. Ltd.

Quick Pointers:

- Reduced FY23/24 estimates by 16%/15% citing margin pressures in the near term.

- Exports in a better position, led by healthier demand and lower base of last year.

We trim our FY23/24E EPS estimates by 16%/15% citing pressure on near term margins and upgrade the rating to 'BUY' from HOLD with revised TP of Rs230 (Rs260 earlier) based on 18xFY24 EPS. Management stated that recent correction in RM prices coupled with high cost inventory will exert pressures on 1HFY23 margins. However, 4-5% price hikes (as compared to Mar-22 levels) will help to partially mitigate the same.

Rallis India (RALI) in its first ever pre-quarterly conference call highlighted that (a) domestic crop care and seeds segment will likely post stable performance in 1QFY23, placements have progressed as per plan and liquidation will take place in subsequent quarters; (b) delayed monsoons do have an impact in terms of placements and liquidation, while some crop shift patterns are visible in cotton and paddy crops; (c) exports will likely grow better than other segments (lower base of last year -8% YoY to aid growth); (d) pressure on margins likely to persist in near term, however, remains confident to maintain absolute EBITDA; (e) price hikes taken to the tune of 4-5% as compared to March'22 levels to mitigate inflated RM cost; and (f) capex plans are on schedule. We expect revenue/PAT CAGR of 10%/4% over FY22-24E (vs 8%/3% over FY11-22). Upgrade to 'BUY' given recent correction in stock price (down >30%).

Slowdown in placements led by delayed monsoons: Cumulative rainfall has narrowed down from -45% deficit in the 1st week of June'22 to a low single digit deficit (-4% as on 24th June'22) largely led by floods in Assam and North eastern belt; however spatial distribution of monsoons has been on the lower end. This in turn has resulted in slowdown of ground activities in terms of product placements as well as liquidation standpoint. RALI has taken price hikes to the tune of 4-5% across portfolio to pass on inflated RM cost during 1QFY23. Hence, with expectation of normal monsoons over next few weeks coupled with remunerative crop prices, RALI remains hopeful for decent performance in domestic business.

Exports likely to fair well; aided by a lower base of last year: RALI remained largely buoyant on the exports business, led by better demand momentum in global markets. We believe that enhanced capacities in export business coupled with lower base of last year (down 8% YoY in 1QFY22) will likely support growth. However, management cited margin pressures on exports business in the near term. We expect revenue growth of 9% YoY in 1QFY23, led by domestic and export growth of 8% and 20%, respectively.

Seeds - progressing as per plan; liquidation likely in 2Q: RALI stated that seeds business is progressing as per plan. Due to delayed monsoons, liquidation has been impacted, while there have been some visible crop shift patterns in cotton and paddy crops. Demand for cotton seeds was impacted due to (a) delayed monsoon in Maharashtra, impacting sowing activities and (b) increased usage of illegal BT cotton seeds. Liquidation of inventories was seen in North India because of better rainfall. However, it remained slow. Next few weeks will be crucial in terms of rainfall and inventory liquidation. While for paddy seeds, the trend is towards selected seeds in certain markets of UP.

Shares of Rallis India Limited was last trading in BSE at Rs. 188.90 as compared to the previous close of Rs. 186.95. The total number of shares traded during the day was 39676 in over 1477 trades.

The stock hit an intraday high of Rs. 193.55 and intraday low of 186.40. The net turnover during the day was Rs. 7554889.00.

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