Rallis India: Capex, better product mix will drive growth

Agrochemicals manufacturer Rallis India , a Tata group company, has grown at a steady pace over the last four quarters ended December 2010. A healthy demand for farm produce and the favourable weather conditions helped the company post a double-digit growth in its top-line as well as bottom-line.

In the December 2010 quarter, its top-line grew 32% to 268 crore on corresponding quarter basis and bottom-line surged 40% to 34 crore. However, increased spending towards marketing initiatives and high raw material (phosphorus and crude) prices led to an 80 basis points contraction in the operating profit margin against the year-ago.

In the quarter, Rallis acquired a 53.5% stake in a Bangalore-based seeds research company, Metahalix Life Sciences, for 99.5 crore, funded largely through internal accruals. The buyout is the company's first step towards expanding its footprint in the seeds value chain, including breeding, production and marketing. Rallis intends to increase its stake in the company to 100% in five years.

The deal is in line with its parent Tata Chemical's (TCL) strategy to offer the entire set of agri-inputs to farmers, thereby ensuring greater association of customers with the company. During the quarter, TCL launched i-Shakti Dal and intends to leverage on Rallis' strong association with farmers and its own established retail presence to sell the product.

Rallis draws 60% of its revenue from the insecticides business; fungicides and herbicides make up the rest. Exports currently account for one-fourth of the total revenue. The upcoming greenfield project at Dahej is expected to augment the international business's share to nearly 35%.

The 150-crore Dahej plant, operating with an annual capacity of 5,000 tonnes, is expected to add 500 crore to the company's top-line in the next three financial years. Also, the plant will enhance the company's product portfolio. Originally scheduled to commence in July 2010, the plant faced certain delays. In January, the company announced that the plant will be commissioned in eight weeks, or by mid-March.

At the current market price of 1,255, the stock trades at nearly 19 times earnings for the trailing 12 months. The company's capacity expansion plans and efforts to enhance its product portfolio are expected to drive future performance.