Rallis India

The Rallis India stock is a value buy for conservative investors looking to add to their portfolio. Rallis India’s profits over the past four years have been aided by a sizeable “other income” component. But there is now the prospect of a substantial improvement in core earnings as the company’s product launches, distribution alliances and restructuring efforts of the past four years begin to bear fruit.

The stock has escaped nearly unscathed from the market meltdown, and features a low FII interest and a substantial holding by domestic mutual funds.

At Rs 370, Rallis India trades at about seven times its trailing 12-month earnings (about Rs 56 per share, excluding exceptional items). That is at a discount to industry peers such as Monsanto India (12 times) and BASF India (nine times).
Challenges met

Rallis India has a leading share in the domestic crop protection market, with a small portion of its revenues derived from seeds, nutrients and leather chemicals.

As with other Indian producers, Rallis India’s strengths lie in reverse engineering of molecules, low-cost manufacturing and an extensive distribution network. The advent of the product patent regime in 2005 and increasing competition from MNCs (they enjoy superior research capabilities and access)contributed to thinning margins for Rallis in recent years. The launch and rising acreage of Bt cotton also cut pesticide use in this crucial segment.

Products and alliances

However, Rallis has countered these threats through a two-pronged strategy. To start with, it has forged strategic alliances with global life science majors such as E.I.Du Pont, Syngenta, Nihon Nohyaku, FMC and Maktheshim Chemicals, opening up its access to new molecules and formulations from their portfolio.

The strategic alliances have also helped Rallis emerge as a key toll manufacturer of agrochemicals for the global players, with nearly a fourth of its revenues now coming from exports.

Aided by the alliances, Rallis has strengthened its product pipeline by adding new-generation products to target non-cotton staples such as paddy, vegetables, pulses and wheat. New products that target sucking pests have also helped sidestep the Bt cotton threat.

The product portfolio now features as many as 26 branded insecticide formulations, 10 herbicide and nine fungicide products. The year 2007-08 alone saw four product launches of which those such as Takumi (insecticide targeting caterpillar attacks),

Applaud (an insect growth regulator for paddy) and Taqat (a vegetable fungicide) were among the successful ones. Given the possibilities for geographic as well as crop diversification, recent product launches may have substantial potential to scale up revenues in the coming years.
Debt-free

These efforts have been supplemented by a financial and operational restructuring. Between 2002 and 2008, the company has exited unrelated businesses, systematically rationalised its manufacturing facilities and disposed off its surplus land and assets.

These generated steady cash flows (the “other income” component in its numbers) which have been deployed in paying off debt, even as working capital requirements have been reduced significantly. With most of the long-term debt paid off, Rallis’ debt:equity ratio has fallen from a peak of over 8:1 five years ago to a negligible 0.1:1 now.
Margins expand

The above initiatives appear to be reflecting in Rallis’ numbers, with operating profit margins and sustainable earnings registering a sharp improvement over the past two years.

For the nine months ended December 2008, Rallis India saw a 77 per cent growth in operating profits (excluding exceptional items) on the back of a 23 per cent expansion in sales; its operating profit margins at 15.9 per cent, up from 11 per cent last year.

While the company’s expanded product pipeline may help sustain the higher profitability, last year’s good monsoon, higher acreages of key target crops such as paddy and cotton and the generous increases in minimum support prices may translate into strong demand and sales growth for Rallis in the year ahead.