Stock Review: RALLIS INDIA

RALLIS India's acquisition of a seeds company marks an important milestone in the long-term strategy of not just Rallis but also Tata Chemicals in catering to the needs of Indian farmers. This addition to the product portfolio will bring significant synergies for the group, which already has an extensive distribution network.

   The acquisition is not likely to boost Rallis' profits in the near-term; in fact, the acquired company, Metahelix Life Sciences, is just breaking even. The main benefit will be in the form of access to Metahelix's elaborate set-up — three research facilities with systematic R&D programme and a team of 50 scientists, product-testing centres across the country, established products in rice, maize, millets and vegetable seeds and good germplasm, which is crucial to developing new seed varieties, besides a strong sales force. Metahelix is also the first Indian company to have a proprietary Bt cotton variety.

   Rallis is paying close to . 125 crore for a 59% stake , with the balance equity stake to be bought in phases by 2015. This arrangement will push back the impact of the acquisition on the balance sheet of Rallis, which is mainly paying from its existing cash reserves. The deal values Metahelix at a little over . 210 crore, nearly twice its expected revenue for FY11, according to the management.

   In terms of future guidance, the Rallis management says the acquired business will generate cumulative revenue of . 1,000 crore over the next five years. This target translates into a cumulative annualised growth rate (CAGR) of 35% over the next five years, if the company ends FY11 with . 100 crore of revenues. How profitable the Metahelix operations will be over the next five years , however, remains to be seen. The seed industry leader, Advanta India, reported a measly 3.4% net profit margin on a consolidated basis for the 12-month period between October 2009 and September 2010. However, smaller players such as Kaveri Seed and Monsanto India enjoyed a net profit margin of 16-17% for the same period.

   The future growth of Rallis India will get a boost from the new agrochemicals plant at Dahej being set up with an investment of . 150 crore. The company is expecting cumulative revenues of . 500 crore from it over first three years of operations. With Tata Chemicals launching a crop and soil specific customised fertiliser, Paras Farmoola, just a few weeks ago, the two large corporates now have a presence in the entire value chain of farm inputs. Their ability to offer a comprehensive solution will provide them with a competitive advantage.