Rallis India

With demand for pesticides rising, the agrochemicals product manufacturer is expected to record a better bottom line in the future

Beta 0.47
Institutional Holding (%) 26.11
Dividend Yield (%) 4.72
P/E 5.9
Mcap (Rs crore) 406

IF STABILITY in growth and fundamental strength were considered as the most important virtues in the current turbulent times, Rallis India can be an attractive option for long-term investors. The agrochemicals product manufacturer is likely to maintain the growth momentum visible in the last four years. The valuations and dividend yield appear attractive for long-term investors.

BUSINESS:

Rallis India is predominantly an agrochemicals manufacturer, which also sells other farm inputs such as hybrid seeds and specialty fertilisers. The company undertakes manufacturing work on contract for leading agrochemical majors. This ensures that its plants works at higher capacity utilisation levels throughout the year besides providing a consistent cash flow. Apart from innovating agrochemicals business, Rallies India is also exploring new areas for growth.

Through its contract manufacturing agreement with US-based Cytec Engineers, the company has emerged as the sole manufacturer of specialty polymer PEKK (poly ether ketone ketone), mainly used in aerospace industry, in the world.

Last year, the company launched an enterprise value-creation programme — Disha — aiming at bringing in improvements in manufacturing and procurement, through plant modernisation, capacity de-bottlenecking, process improvements and cost reduction.

Its efforts towards targeted growth in its international business are also paying off well. Following the success of Disha phase 1, the company has initiated Disha phase 2 for creating value in sales and marketing.

Revenues from the new products were 30% for the financial year 2008 and Rallies India is taking conscious efforts to maintain the proportion. It plans to set up additional manufacturing facilities at Dahej in Gujarat.

GROWTH DRIVERS:

The global agriculture industry is facing challenges to improve productivity to cater to the food as well as the energy requirements of the ever-increasing population. This coupled with higher agro-commodity prices, is likely to maintain a healthy demand for pesticides in the coming years.

Rallies India has recently closed down its plant at Patancheru in Andhra Pradesh to unlock value in the land bank. Meanwhile, it is also setting up agrochemical plants in Dahej and Jammu, which will commence production in 2010. At Dahej, the company has secured land in special economic zone (SEZ) and notified chemicals zone (NCZ) and it also plans to spend over Rs 150 crore in two phases there. Besides, another captive power plant at Ankleshwar will also developed by the company.

Rallies India’s focus on specialty products is helping it earn better margins. The company is expected to continue its new product launches to keep its innovative sales above 30% of its total revenues.

FINANCIALS:

Rallis India, which was making operating losses till FY2004, has made a strong turnaround and posted PAT of Rs 125 crore in FY08. As part of the turnaround strategy, the company has liquidated several assets raising Rs 244 crore in the last five years, including Rs 87 crore of profit on sale of land in FY08.

It has consistently reduced its debt-equity ratio over the last five years to 0.15 by the end of FY08, while the return on employed capital has jumped to 23.7%. The company’s operating margins grew strongly last year.

For the 12-month period ended December 2008, the company reported a 21% growth in sales to Rs 813 crore. Its operating profit margins rose by 350 basis points, resulting in 73% spurt in PBT to Rs 103 crore. However, the extraordinary income of Rs 87 crore on sale of land in the previous year makes the current PAT at 45% lower.

The company no longer has the benefit of carry forward losses and started paying tax at full rate applicable to corporates from the December 2008 quarter. Once its plants in Dahej and Jammu become operational, the effective tax rate may decline.

VALUATIONS:

Rallis India has outperformed broader market and has maintained its price-toearnings ratio (P/E) intact over the last one year. We expect the company to finish FY09 with EPS of Rs 59.5 and FY10 with EPS of Rs 71.3 excluding any extraordinary income. At the current market price, the scrip is trading at 5.7 times its expected net profits for FY09 and 4.8 times its estimated FY10 earnings. It paid Rs 16 per share as dividend in FY08 and is likely to maintain it in future. At its current price, the dividend yield works out to 4.7%, making it a safe bet for risk adverse investors.