Q4FY23 Review: Rallis India: Limited near-term triggers

27 Apr 2023 , 12:46 PM

In a seasonally lean Q4, Rallis reported muted results with modest revenue growth and sharp decline in Ebitda margins. International as well as domestic businesses saw pricing pressure, owing to buildup of inventory. Nevertheless, collection trends were healthy, resulting in better working capital position. Rallis refurbished Seeds portfolio by writing off slow-moving inventory and non-resourceful intangibles. Outlook for upcoming Kharif season is modestly positive as onset of El Nino would only commence post-monsoon.

Analysts of IIFL Securities cut FY24-25 EPS by 6-9% to factor near-term pricing pressures. With a Jun’25 EPS (roll forward from Mar’25) target multiple of 18x (cut from 20x). The TP comes down from Rs245 and now stands at Rs215.

Weak results in a seasonally small quarter:  

Rallis India reported muted earnings, largely on the back of a sharp decline in gross margins. Domestic Crop care business was flat on a YoY basis and missed IIFLe by 11%. International business clocked 7% YoY growth (modestly above IIFLe). Moreover, Rallis created an inventory and intangibles provision of ~Rs630mn in the Seeds business.

Pricing headwinds mounting: 

Domestic Crop protection is facing challenges from excess channel inventory and collections. Hence, there are possibilities of pricing pressures mounting during FY24. Likewise, in exports, excess inventory across customers and regions also pose near-term risks. Price correction for Rallis’ key products like Acephate, Metribuzin and Pendimethalin was in the range of 5-20%. 

Remain cautious on earnings: 

FY23 was another disappointing year for Rallis, owing to margin pressure on Exports business and subdued volumes in domestic Crop care business. Rallis’ margin continues to suffer and visibility for improvement from hereon is fairly limited. Successful commissioning and subsequent ramp-up of MPP is the only near-term trigger for earnings growth at this point. Hence, we expect the stock to be remain range-bound.