Stock Review: RALLIS India

Stock Review: RALLIS India

 

The Tata Group agrochemicals major, Rallis India, stands to benefit from growing demand for crop protection products, thanks to its capacity expansion, strong balance sheet and entry into seeds business. Long-term investors should hold this scrip. The significance of agriculture is rising the world over as growing population and changing demographics are raising demand for food grains, while the limited availability of land is a key constraint. In this scenario, demand for the crop protection industry is growing strong to improve farm productivity. The trend, which visibly benefited Rallis in the past few years, is set to continue in foreseeable future as well.

GROWTH DRIVERS

Rallis has recently commissioned its Dahej unit at a capex of 150 crore operating with an annual capacity of 5,000 tonne. The plant will primarily cater to export markets, increasing the share of international business in the overall revenues to nearly 35%. According to the company, this new capacity will bring an average of 100 crore of revenue every year for the next five years. The company entered into the seeds business — another key growth area essential for boosting the farm productivity — through an acquisition. The acquired company, Metahelix, is likely to launch its BT cotton hybrid seeds in the next two years that will add to the company's revenue. The seeds business is already profitable as was seen in the June 2011 quarter results. Further, the company is looking for inorganic growth opportunities in the domestic and global agrochemicals market especially in the chemicals space. Globally, Latin America, Asia and Africa are the key regions witnessing strong agrochemicals demand growth with Indian demand rising at 12-15% annually.

FINANCIALS

The pesticides maker has posted healthy financial growth over the past several quarters. During the June 2011 quarter, it reported a 50% rise in topline at 292 crore against the year-ago period. However, the numbers are not comparable as the revenue growth was driven mainly by the company's seeds business — Metahelix alone posted net sales of 59 crore during the quarter. On the operating margin front, driven by the high margin seeds business, Rallis reported a 140 basis points jump to 13%. The company's bottom line grew over 50% to 23 crore.

VALUATIONS

The stock is currently trading at 24 times its earnings for the trailing 12 months which is higher compared with its peers such as Bayer Cropscience and United Phosphorus that are trading at a P/E multiple of 20 and 11, respectively.
However, this appears justified as rising Metahelix business, continued momentum in the company's core business and incremental revenue contribution from the Dahej facility are expected to drive the company's future performance.