Rallis India CMP: 164.55
Attractive valuation and strong growth outlook make this agrochemical company a good buy.
Strong Q1 performance: Rallis India, which manufactures pesticides, seeds and leather tanning material, has surprised with its strong first quarter numbers. It was helped by the better-than-expected performance of its seeds business and launch of new products. Its consolidated revenue and net profit moved up by 47% and 56%, respectively, compared with that in the corresponding period last year. Impact of Metahelix: Rallis India has performed well even without accounting for the impact of acquiring Metahelix Life Sciences. Rallis bought a 53.5% stake in this seed company in December 2010. Though a major portion of Rallis’s higher revenue came from Metahelix, its own revenue has grown by 19%. On a standalone basis, Metahelix reported sales of 59.3 crore, led by a robust demand for seeds in the pre-monsoon period, and has contributed significantly to the improvement in its EBITDA margin as well. However, Rallis India’s EBITDA margin without the Metahelix impact improved by 190 basis points. Rallis India, in which Tata Chemicals holds more than a 50% stake, plans to ramp up the seeds business once it aligns its manpower and distribution network with that of Metahelix. The seeds business could grow significantly once it receives the approval for BT cotton seed. Concern over monsoon: Though the monsoon is still below the longterm average, it has reached all parts of the country and sowing is in full swing. This means that the near normal sowing of key crops, such as cotton and rice, should continue to generate demands for pesticides and fertilisers. Analysts are hopeful that given the reducing inventory, the agrochemical industry will be able to raise prices in the coming months. With a strong distribution network and product pipeline, Rallis India is expected to outperform the industry. Product launches: Of the six product launches planned in 2011-12, the company has already introduced three in the domestic formulations business—insecticides Neon and Sonic, and herbicide Vaar. These should help Rallis India ramp up its product portfolio in the herbicide space, which is the fastest growing segment in the agrochemical industry. Capacity addition: Towards the end of the June quarter, the company also commenced commercial production at its plant at Dahej, in Gujarat. As a result, the capacity would be ramped over 2011-12. Reasonable valuation: With the global food prices continuing to remain at elevated levels, the agrochemical sector will stay in the limelight. Considering the current market price of 162, Rallis India is quoting at 18.6 times its expected earnings in 2011-12 and 14.6 times its expected earnings in 2012-13. Though this is higher compared with that of its Indian peers, Rallis India can boast several positive factors like strong growth outlook, high quality management, etc, that can justify this premium valuation.
