ICICI Direct recommended hold rating on Rallis India with a target price of Rs 180 in its research report dated January 21, 2019.
ICICI Direct's research report on Rallis India
Rallis India reported a subdued Q3FY19 performance. Consolidated revenues in Q3FY19 were at Rs 417.4 crore, up 7.0% YoY. It was largely realisation led growth with minimal volume growth Standalone revenues in Q3FY19 were at Rs 388.2 crore, up 8.7% YoY. Revenues of subsidiaries (Metahelix, etc.) in the seasonally lean quarter, were at Rs 29.1 crore, down 11.5% YoY Consolidated EBITDA in Q3FY19 came in at Rs 27.7 crore with corresponding EBITDA margins at 6.6% (down 300 bps YoY). Lower margins were driven by high one-offs amounting to ~Rs 11.6 crore of which ~Rs 2.2 crore started to get reversed in the following quarters High one-offs included ~Rs 4.9 crore of excess sales return, ~ Rs 2.2 crore of debtor write downs, ~Rs 3.0 crore of one-time expenses to absorb new technology & ~Rs 1.4 crore as product write-down Consolidated reported PAT in Q3FY19 was at Rs 13.8 crore The company has embarked upon a new capex programme worth ~Rs 800 crore at Dahej over the next five to six years to spend ~Rs 100 crore in Phase 1 and ~Rs 170 crore in Phase 2. It will transform Rallis from a predominant agri-input player, at present, to a speciality chemical player in the domestic as well as global arena.
Outlook
PAT growth has largely been missing at Rallis in the last two years with FY17-19E normalised PAT nearly flat despite ~10% sales CAGR. It is primarily driven by a declining margin trajectory driven by competitive pressure in the marketplace as well as an abnormal increase in raw material procurement costs. The company is yet to deliver on raw material costs savings either in the form of alternate sourcing or backward integration. Interestingly, Rallis has embarked on a new capex plan that is likely to change its DNA from an agri input player to a speciality chemical player in next five to six years. However, we will await a better performance in numbers before any meaningful change in our stance. Going forward, we revise our estimates incorporating the 9MFY19 performance. On a consolidated basis, we expect revenues, PAT to grow at a CAGR of 14.0%, 11.0%, respectively, in FY18-20E. We value Rallis at Rs 180 i.e. 17x P/E on FY20E EPS of Rs 10.6 with a HOLD rating.
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