Stock Review: Rallis India

Rallis India, a Tata Chemical subsidiary, has acquired a 53.5 per cent stake in Bangalore based Metahelix Life Sciences for `99.5 crore in an all-cash deal. Going ahead, after subscribing to an additional equity of `25 crore and increasing its stake to 59.02 per cent, Rallis will enhance its holding to 100 per cent over five years. At present, Metahelix is predominantly present in hybrid seeds and plans to launch Bt cotton within a year.

According to analysts, with Metahelix valued at 1.92times 2011-12 estimated revenues, the deal looks quite attractive. The Bangalore based company is estimated to garner `100 crore during 2011-12. Angel Broking says the valuation is in line with that of the peers in the seed business.

However, looking at the high research and development (R&D) expenses, Metahelix' operating profits are currently minimal. According to analysts at Prabhudas Lilladher, Rallis believes the company is likely to become earnings per share accretive only by 2011-12, when R&D expenses to sales ratio comes down.

Rallis will benefit from the acquisition, as the seeds business enjoys a better margin of around 20 per cent compared to the pesticides business (around 18 per cent). The `6,500-crore Indian seeds industry is growing at 12-13 per cent a year, according to Angel Broking. Of this, the commercial segment accounts for 25 per cent of the total market. Hence, the opportunity for commercial seeds is substantial. While Metahelix has astrong presence across the nation, with a powerful network selling Dhaanya seeds, growth will be further propelled by Rallis' strong distribution channels.

Given that the seed industry has high entry barriers in the form of product IP (technology), regulatory clearances and substantial R&D and manpower investments, the development of a product takes years. The acquisition of Metahelix will strengthen the company's seeds business, which currently contributes just around one per cent to revenues, reckon analysts.

The acquisition of Metahelix will strengthen the seeds business