Rallis India

Strong Fundamentals Make Stock A Safe Pick

 

A TATA enterprise and a leading player in the agrochemicals industry, Rallis India reported a decent set of numbers for the June 2010 quarter. The company's improved revenue and operating profit indicate that the shareholders should stay invested in the stock.

   During the period, the company's top line grew 20% to Rs 196 crore from a year ago due to the improved performance of the domestic business driven by the new agrochemical products launched in recent years. The operating margin fell by 80 basis points (bps) to 11.6% due to a 320-bps increase to 20.3% in the other expenses and a 150-bps dip to Rs 9.4% in the staff costs as a percentage of net sales. Despite the marginal drop in the operating margin, Rallis managed a 58% increase in its bottom line to Rs 15 crore during the period as interest and depreciation costs stagnated. A 560-bps drop in the effective tax rate to 22% also helped.

   The company's exports had remained somewhat subdued till the last quarter of FY10 due to high inventory levels in the US and Latin America and a drop in the agrochemical prices. It was only in the March '10 quarter that the overseas demand stabilised due to lower inventory levels. The growth momentum helped the company improve exports in the June 2010 quarter.

   Going forward, Rallis is expected to benefit from its new project at Dahej with a capacity of 5000 tonne per annum, which will get commissioned this month. The plant will enhance the company's product portfolio and also would be able to produce Rs 500 crore of revenue over next three fiscals. Besides, the company will gain from the enhanced product mix it is expected to achieve through the recently signed marketing pact with a Switzerland-based agri-business company Syngenta. Rallis will now be able to source a fungicide Azoxystrobin from Syngenta and market it in India for crops like rice, vegetables and fruits. This arrangement will augment Rallis' product offering to the farmers.

   At the current market price of Rs 1,170.3, the company's scrip is trading at 21 times its earnings for trailing 12 months. Rallis continues to be the most expensive stock in the sector. However, given the anticipated growth in the agricultural sector and the additional capacity that will come into play soon, it is expected to register strong growth numbers in coming quarters.