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Hold Rallis India Ltd For Target Rs.271

Erratic rains dampen party

Rallis India posted Q2FY22 results below our and consensus estimates with EBITDA/PAT declining 24%/32%. Uneven rains during kharif coupled with a change in product pattern severely impacted the demand for agri-inputs during H1FY22. On top of it, supply-side disruptions in China led to a sharp uptick in input prices, which are likely to impact the company’s margins in the near term in our view.

While good reservoir levels are likely to yield improvement in demand for agri-inputs in the rabi season, issues pertaining to availability of key intermediates from China may impact Rallis’s performance over H2FY22. Factoring in a muted kharif, we are slashing FY22/23E EPS by 23%/13%. Retain ‘HOLD’ with a TP of INR271 (22x Q3FY23E EPS).

Agrochemicals: Uneven rains spoil demand

Rallis reported ~3% YoY growth in the domestic crop care business with volumes up 2% YoY. The weak performance is largely on account of a dull spell of monsoon in July–August. The herbicide product basket saw a sharp impact of the delay in crop sowing, which led to lower offtake by end-users. Though insecticide and fungicide sales have been less impacted, the company has been facing challenges in terms of availability of raw materials. Given a sharp increase in input prices, Rallis has taken an 8–10% increase in its product basket. Globally, the company expects traction to remain strong with commodity prices remaining favourable. Rallis’s molecules such as Pendimethalin and Hexaconazole have seen good demand, Metribuzin continues to face muted demand

Seeds: Higher sales return lead to steep fall in revenues

The seed segment reported a plunge in revenue of 65% YoY to INR 256mn. The loss in revenues over H1FY22 (down 11% YoY) was primarily on account of higher sales return, amounting to nearly INR1.8bn. Cotton seed sales (12–13% of revenue mix) was impacted due to influx of illegal seeds as well as a change in the crop pattern by farmers. Millets’ seeds sales during the quarter declined owing to a drop in the crop price. Rallis’s inventory in seeds remains on the higher side. It introduced five hybrid.

Outlook and valuation:

Margin concerns; maintain ‘HOLD’ Rallis is likely to see good demand traction in H2FY22; however supply-side disruption from China may impact overall production levels. Given a muted kharif, we are slashing FY22/23E EPS by 23%/13%. Maintain ‘HOLD’ with a TP of INR271 (22x Q3FY23E EPS).

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