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Disappointing quarter but paving the way to recovery
Rallis India Ltd (RIL)’s Q4FY19 consolidated performance was disappointing on all the fronts. Its revenue de-grew by 8.5% YoY to Rs 340cr due to subdued domestic business. EBITDA declined by 80.5% YoY to Rs 7cr due to higher input cost (Chinese imports) and low operating leverage due to weak volumes. Further, one-off expenses of ~Rs 12cr adversely impacted its operating performance. Despite higher other income, net profit to equity holders declined by 92.3% YoY to Rs 2cr led by decline in EBITDA and increase in taxes. We expect RIL’s performance to improve going forward led by strong growth in international markets, traction in value-added products, increasing distribution reach, a better dealer incentive structure and capacity expansion in key products. We maintain a Buy on the stock.
Q4FY19 Result Update:
* Domestic business growth was affected owing to subdued demand in the pesticide business and weak rabi season. Revenues from the domestic pesticides business declined by 20% YoY largely due to fall in volumes. The decline in sales was restricted by strong performance of the international business which grew by 10% YoY.
* Decline in EBITDA was a result of higher raw material cost (imports from China). Further, one-off expenses (RIL incurred one-time charge of Rs 7.2cr on account of retrial benefits and Rs 5cr contribution to electoral fund) led to sharp decline in EBITDA. Consequently, net profit declined by 92.3% YoY to Rs 2cr as a result of poor operating performance and higher tax rate (75.8% in Q4FY19 vs 22.3% in Q4FY18).
* Other key conference call highlights:
(a) RIL is working towards improving product mix – share of value added / specialty products to offset impact of rising raw material prices. Thus, the company expects profitability to pick up going forward. (b) It plans to add new distributors/retailers to enhance growth, revitalize dealer structure. It has also eased credit norms for the dealers. (c) RIL plans a capex of Rs 800cr over the next 5 years to double capacities in existing and new molecules as well as to carry out expansion program by increasing presence in north and east markets. (d) It also plans backward integration for certain products in order to reduce dependency on imports. (e) The company expects the domestic-export revenue mix to change from ~70:30 currently to 60:40 in the next few years.
Outlook & Valuation:
In Indian agriculture, utilization of crop protection and agrochemicals in improving farm productivity is still low. This provides an immense scope for market expansion for Rallis. Factoring in a weaker than expected performance, we have revised our EPS estimates slightly downwards. However, attractive valuation (12.5xFY21E) as well as several growth initiatives undertaken by RIL and forecast of a normal monsoon this year bodes well for the sector growth. Thus, we recommend a Buy with a revised target price of Rs199 per share.
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