Q2 Comment . Rallis India: A decent quarter, despite weaker-than-expected monsoon

The stock of Rallis India was trading lower by 2 per cent after the company posted its September quarter results on Wednesday. A weaker-than-expected monsoon leading to lower-than-anticipated sales growth, rise in raw material costs and an overall negative sentiment on account of drop in agri commodities, including cereals, appears to have weighed on the stock.

That said, given the headwinds within the space, the performance of Rallis—a manufacturer of insectisides, fungicides and seed treatment products—in the September quarter is still noteworthy.

The company has reported a 12 per cent revenue (standalone) growth, y-o-y. Net profit was up 10 per cent. Revenue for the half year ended September 30 was ₹1,227 crore, up 18 per cent, and profit was up 17 per cent, y-o-y.

Uneven rainfall

Revenue growth has been impacted by the drop in kharif acreage. The total acreage was down 2 per cent over the last year (area under pulses was down 4 per cent). Drop in acreage may be attributed to the uneven distribution of rainfall in the southwest monsoon. Many states including Gujarat, west-Rajasthan, Bihar and north-interior Karnataka have witnessed over 20-25 per cent deficiency in rainfall.

“There was a lot of variation in the temporal and spatial distribution in rainfall which affected the crops”, said the management of Rallis in a concall with analysts post the results.

The long dry patches in southwest monsoon also reduced pest attack, affecting the company's sales of agro-chemicals. There was no major attack of pink bollworm in cotton or sheath blight in paddy. There were very few incidences of pest attack on pulses, too. However, with hot weather in Europe and a good demand from Brazil and Latin America too, export revenues (make for about 30 per cent of the Rallis' revenue) grew strongly and helped buttress overall sales growth.

Higher input costs

Cost of inputs went up due to increase in price of chemicals (due to higher crude oil prices) and a weaker rupee. Significant amount of raw materials are imported by the company from China. However, selective price hikes both in domestic and international market, cushioned the margins.

Operating profit margin for the September quarter declined two percentage points to 21.1 per cent versus 23 per cent in the same quarter last year.

Outlook

With the kharif season behind, all eyes are on the rabi season. Water levels in key reservoirs are satisfactory at present, implying that the prospects for rabi crops may remain sanguine.

Investors with a long term view, can still bet on the company. The vacuum in the agro-chemicals space with China stepping back, offers a good opportunity for domestic players in the space. China’s stringent rules to check pollution, has seen many large chemical factories shutting down. Others, upgrading machines to comply with the new norms, have seen costs go up significantly, providing an edge for Indian companies to compete better in the global market. The US-China trade tensions can also work in favour of Indian players such as Rallis.

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