Stock Review: Rallis India

Rallis India, a Tata Group agrochemical company, has posted a stellar performance on the bourses over the past one year, gaining 40% against a marginal 6% growth in the benchmark Sensex. This was mainly driven by its consistent double-digit profit growth over the past five quarters. However, the scrip seems to have lost its tempo after a weak March 2011 quarter result.

During the March quarter, Rallis' topline grew 14% to . 220 crore against the year-ago period on the back of a strong volume growth in the domestic formulation business and traction in the international business. However, margin pressure led to a 13% year-on-year fall in the company's net profit to . 19 crore, breaking the nine quarters' long tradition of consistent profit growth. The operating profit margin dropped 260 bps to 16% compared to the March 2010 quarter.

The shift in the company's focus on herbicides segment, which is a low-margin business, led to a sharp decline in the margins. Fungicide and herbicides business contribute nearly 40% to the company's overall business while the insecticides business constitutes the rest. Also, the company's raw material cost, relative to net sales, jumped 740 basis points (bps) to 62% during the quarter against the corresponding period last year.

Over the past three quarters, the company has witnessed an erosion in its operating profit margin. The continued focus on the low-margin herbicide business and rising raw material prices are likely to pose pressure on the margins in coming months. To offset the same, the company is expected to implement a price hike in FY12. At the current market price of . 1371.5, the stock trades at nearly 18 times its earnings for the trailing twelve months. Benefits from its Metahelix acquisition and strengthening iShakti initiative apart from the commencement of Dahej plant are the positive triggers. The Dahej plant being set up at a cost of . 150 crore will be able to generate . 1,000 crore turnover over a five-year period.