Edelweiss Research recommends Hold on Rallis India

Report on Rallis results by Edelweiss Research

Rallis India (RALI IN, INR 240, Hold)

Rallis India’s (Rallis) INR3.5bn revenue in Q4FY17 fell 1% YoY (net of excise) and came 9% below estimate; however, for FY17, it jumped 10% YoY. Though standalone Q4FY17 revenue at INR3.3bn was flat YoY, revenue of subsidiaries (mainly Metahelix) dipped 20% YoY to INR205mn. EBITDA margin contracted 86bps YoY to 12% with EBITDA at INR416mn falling 8% YoY. While PBT was also down 31% YoY, a lower tax expense led to PAT contracting by only 10% YoY. With growth faltering for second consecutive quarter and new launches failing to gain traction, we continue to remain cautious. We maintain our target P/E at 18.0x yielding target price of INR233. Maintain ‘HOLD’.

Q4FY17 highlights: Sales growth moderates for 2nd quarter in a row

Rallis’ Q4FY17 revenue at INR3.5bn fell 1% YoY (9% below estimate). In Q3FY17 as well, growth had come in at only 7% YoY (H1FY17: 15%). Overall, for FY17, revenue jumped 10% YoY with exports contributing 31% to total revenue. The exports division performed better than the domestic business this year. Though standalone Q4FY17 revenue at INR3.3bn was flat YoY, revenue of subsidiaries (mainly Metahelix) dipped 20% YoY to INR205mn. While gross margin improved 300bps YoY to 39.6%, sharp increase in other expenses led to EBITDA margin contracting 86bps YoY to 12%. EBITDA at INR416mn fell 8% YoY. Though PBT slipped 31% YoY to INR315mn, a lower tax expense saw PAT contracting by only 10% YoY to INR311mn.

Analyst meet key highlights: Innovation index at all-time low

The company did not launch any new product during Q4FY17. In FY17, it launched 3 new products ‘Summit’, ‘Epic’ and ‘Quest’. Also, the rabi season has been particularly bad in South, which has led to paddy sowing falling 12% YoY. As a result, some of Rallis’ recent launches like ‘Hunk’ and ‘Duton’ have not performed well. Overall, the innovation index has hit an all-time low of 7% in FY17 (FY16: 11%).

Outlook and valuations: Sporadic growth; maintain ‘HOLD’

With growth not picking up and performance of new products also not gaining momentum (innovation index down to 7%), we continue to remain cautious. Though the monsoon outlook remains uncertain, we estimate 15% YoY revenue growth (on expectation of normal monsoon) for FY18 and FY19. We value Rallis at 18.0x FY19E EPS, yielding a revised target price of INR233. We maintain ‘HOLD’.

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