Research Reports

Edelweiss Research recommends Hold on Rallis India

| Updated on January 15, 2018 Published on April 26, 2017

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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