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Exports driving momentum

Rallis India (Rallis) reported in-line Q3FY22 results with sales/EBITDA growth of 10%/12% YoY. While growth has been largely driven by pricing hikes taken in view of escalation of input prices, the pickup in exports business is a key positive. The domestic crop care business turned in 9% YoY growth despite weakness in southern markets. Seeds continues to remain under pressure (down 31% YoY).

Over Q4FY22, good reservoir levels and favourable commodity prices are likely to drive earning momentum. However, raw material issues from China continue to constrain the supply side. We also remain watchful of execution of capex strategy. Maintain ‘HOLD’ with a TP of INR294 based on 22x Q1FY24E EPS.

Crop protection:

Realisation-led gains Rallis’s domestic crop care business delivered 9% YoY growth driven by pricing hikes. Unseasonal rains as well as lower pest infestation in southern markets impacted overall volumes during the quarter. However, with good reservoir levels in place, the company expects Q4FY22 to be positive. In Exports, the momentum sustained amid favourable commodity prices. During the quarter, the company delivered a strong 19% YoY sales growth aided by pricing gains. Revival in Metribuzin demand is noteworthy. The company’s contract manufacturing business continues to face the headwinds from covid-19. However, it has been trying to convert order enquiries. Availability of raw material continues to be a concern given the company’s raw material exposure to China is more than 50%.

Seeds:

Still under pressure; capex outlay positive The seeds industry continued to face headwinds due to restrictions on sale of paddy and maize hybrids in some states. Accordingly, Rallis registered a 31% YoY plunge in revenue during Q3FY22. The company is trying to improve product portfolio pertaining to rabi. The company’s Innovation Turnover Index (ITI) remains 11%. Going forward, Rallis’s strategy remains on commercializing new Active Ingredients (AIs), new formulations, etc.

Outlook and valuation:

Capex execution critical; maintain ‘HOLD’ Rallis has been facing headwinds due to limited supply of raw materials along with higher logistic costs. Going forward, while rabi looks stable with acreage up more than 1% YoY, a sharp increase in input costs is likely to keep margins under pressure. Maintain ‘HOLD’ with a TP of INR294 (22x Q1FY24E EPS).

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