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Rallis India: High fertile growth

Source : BUSINESS_STANDARD
Last Updated: Tue, Jun 12, 2012 19:32 hrs

Rallis India, a Tata Group company, has seen its share price rally 11 per cent in less than a week, following the news about Rakesh Jhujhunwala increasing his stake in the company by almost half a percentage point, to 8.46 per cent. While this announcement has boosted sentiment, Rallis' fundamental outlook also appears good.

In the under-penetrated crop protection market, Rallis, a dominant player, is set to benefit, led by its initiatives such as new product launches, investments in contract manufacturing and focus on high growth areas. Analysts expect earnings growth of 25-30 per cent for the company over the next two years. Besides earnings visibility, its leading position in the sector, strong management, negligible debt (Rs 82 crore as on March 2012), high margins and strong return on equity (RoE) are key positives that attract investors. In this backdrop, analysts believe at the current price of Rs 134.35 the stock is reasonably valued at 17.6 times its FY13 and 14 times FY14 estimated earnings, and offers upside potential of about 20 per cent.

Adding alpha to growth
The company is looking for bigger opportunities in contract manufacturing. Its newly commissioned facility at Dahej (Gujarat), with annual capacity of 5,000 tonnes, is mainly dedicated for this purpose, from where contract manufacturing activities for large global companies are being undertaken. Analysts believe the company is aiming for Rs 550-600 crore of sales turnover from this facility, almost half of Rallis' current turnover, in the coming years. While this facility will help propel revenue growth, it will also help the company to diversify its geographical risks. Overall, analysts are expecting international revenues to account for at least 40 per cent of total revenue in FY14, compared to 24 per cent in FY11.

IMPROVING PROFITABILITY
In Rs crore FY12 FY13E FY14E
Revenue 1,275.0 1,492.0 1,733.0
OPM (%) 15.9 17.2 18.1
Net profit 99.2 148.0 185.0
Debt/equity (x) 0.3 0.2 0.0
Return on equity (%) 22.3 24.8 26.4
EPS (Rs) 6.1 7.6 9.5
PE (x) 22.0 17.7 14.2
E: Estimates Source: IIFL

That apart, with the acquisition of Metahelix (a Bangalore-based seeds company) in the year 2010, Rallis forayed into the seeds market, also a fast-growing segment within the agriculture space. Importantly, Rallis has turned around Metahelix from a loss in the previous year to a profit of Rs 60 lakh in FY12, on a turnover of Rs 81.4 crore. And, there are more gains in the offing. The management is aiming to take Metahelix's revenues to Rs 1,000 crore in the next five years, which should also reflect positively on profits.

In another move, Rallis has entered into a definitive agreement to acquire 51 per cent stake in Zero Waste Agro Organics, a manufacturer of organic manure and soil conditioners, in an all-cash deal worth Rs 29 crore and to be funded through internal accruals.

Rallis expects to gain from the opportunities in this emerging segment and also aims to leverage the marketing strengths of this company to expand its portfolio into the domestic and international markets.

Strong domestic base
Meanwhile, it has a strong presence in the domestic crop protection market, with a 13 per cent share. Its distribution network covers 80 per cent of India's districts, with about 1,500 dealers and 40,000 retailers. Initiatives such as acquisitions, extension of product portfolio, foray into foreign markets and into other segments of the agri-input business have started to add to overall growth. While these opportunities and initiatives have helped Rallis more than double its turnover in the past five years, its profits have increased 18-fold.

Notably, the opportunities are huge, given that India's consumption of agricultural chemicals is one of the lowest in the world. Only 35-40 per cent of farmland is under crop protection and the usage of inputs such as pesticide are even lower than in Pakistan. While the long-term outlook appears good, expectations of a normal monsoon, coupled with higher minimum support prices for crops, indicate the current financial year should also end on a good note for the company.

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