Rallis India Ltd: International business impacts Q2, recovery underway

Rallis India, a subsidiary of Tata Chemicals, posted commendable growth in Q1 domestic crop protection segment, the segment posted relatively lower 8% YoY growth in Q2. 

International business continued to remain under pressure in Q2 particularly impacted by lower Metribuzin volumes coupled with reduced pricing. Overall, Rallis reported 3.2% YoY decline in top-line at ₹ 7.3bn (₹ 7.5bn), however gross margins improved 200bps YoY at 38.1% (36.1%) due to better product mix and favourable pricing for certain products. Lower travel costs, advertising expenses contained other operating expenses. EBITDA margins improved marginally by 30bps YoY from 15.8% to 16.1%. EBITDA however, contracted marginally at 1.6% YoY from ₹1.19bn to ₹ 1.17bn in Q2. During the quarter the company also had exceptional income of ₹ 17mn pertaining to profit from sale of flats. Overall, the company reported 3.0% YoY decline in PAT at ₹ 830mn (₹ 855mn). 

Domestic crop care business was impacted due to excessive rains which resulted in lower usage of pesticides and low pest infestation particularly in paddy and cotton. Domestic crop protection segment reported 8% YoY growth while seeds reported 29% YoY surge in revenues albeit at a lower base. Rallis launched one 9(3) product during the quarter, a fungicide for grapes. However, sales from products launched last year remained muted due to Covid issue. International business was impacted severely particularly due to lower Metribuzin volumes couples with lower realisations. Yet, management remained confident of scaling up Metribuzin capacity utilisation in coming quarters with optimal utilisation of the expanded capacity by Q1FY22E. 

Domestic crop protection business impacted due to excessive rains: Rallis’s domestic crop protection segment reported 8% YoY growth at ₹ 4.9bn (₹ 4.5bn), impacted by excessive rains and low pest infestation. Seeds segment on the other hand, reported 29% YoY revenue growth at ₹ 730mn (₹ 570mn) and EBITDA of ₹ 100mn propelled through higher volumes and better pricing. Although, the company’s cotton seed business didn’t perform as per expectations, Maize supported overall segment with over ₹ 1bn sales during the season. Vegetables segment is also picking up and is likely to grow at faster clip. 

International business suffers: During Q2FY21, international business reported revenues of ₹ 1.5bn against ₹ 2.2bn in Q2FY20 impacted primarily from lower Metribuzin volumes as well as realisations. However, Metribuzin volumes have started picking up from end-Q2. Contract manufacturing revenues too suffered for both PEKK and Metconazole. PEKK is likely to remain under pressure due to current slump in airline segment. 

Capex on track post Covid delay: Rallis’ formulation plant at Dahej is expected to be commissioned by March 2021 while MPP for AIs likely to come up by Q3FY22E. Rallis has committed over ₹ 5.3bn capex of its ₹ 8.0bn plan including further approval of ₹ 0.7bn during the quarter. Management guided ₹ 1.5bn capex for FY21E with overall capex of ₹ 3.5bn over FY21-22E.

Q2FY20 concall highlights

Q2 Business and Financial Performance

• Excessive rains resulted in lower usage of pesticides and low pest infestation particularly in paddy and cotton

• Fall army worm attacks contained throughout India

• Channel inventories normal

• One 9 (3) product launched during the quarter, fungicide for grapes

• Maize – crossed ₹ 100cr, driven particularly by Tamil Nadu 

• Exceptional item – ₹ 1.65cr Profit on sale of flats

• WC days – 65 (104days), due to change in trade terms, liquidity in rural economy is good 

• Cash flow from operations – ₹ 279cr (₹ 218cr)

Recent developments – Rallis

• Metribuzin – volumes started only from end-Q2

• Metribuzin – realisation declined by ~40% YoY however RM prices have also come down, yet margins have not got impacted substantially

• Expect Rabi to be similar to last year

• Scale up of products launched last year hampered due to Covid issue (6 New products launched in FY20 (3 of them 9(3) and 3 co-marketing products)), growth driven by old products

• Increased RM inventory due to Covid-19

• Received own registration approval for Metribuzin for USA

• Capex delayed by 2-3 months due to Covid

Domestic Crop Care business

• Crop care segment revenues – ₹ 652cr (₹ 692cr), 6% YoY revenue degrowth due to decline in international business

• Domestic crop protection – ₹486 (₹ 451)

• Domestic crop protection business growth at 8%

• Metribuzin – 2/3 volumes on a YoY basis, pressure on prices and volumes

• Degrowth in contract manufacturing both in Metconazole and PEKK

• EBITDA – ₹ 107cr (₹ 120cr), PAT - ₹ 82cr (₹ 83cr), high PAT due to adoption of lower tax rate 

• Price erosion in Metribuzin impacted margins

• Better realization on Acephate (17% YoY volume growth) & Pendimethalin (40% YoY volume growth) Tech and some of our branded products helped compensate partially

• Volume growth 10%, marginal degrowth in realisations

• Crop nutrition – 30% growth in 1H

• Process of expanding Pendimethalin capacity, added Hexaconazole capacity in 1H

• Expect 10-12% growth in domestic agrochemical segment

Metahelix – Seeds

• Revenues – ₹ 73cr (₹ 57cr), 29% YoY growth

• Volume growth in Maize (25% growth in 1H), better pricing in Paddy

• EBITDA – ₹ 10cr (₹ 0cr) due to higher volumes and better pricing

• PAT – ₹ 1cr (₹ 2cr) lower due to higher effective tax rate YoY

• Cotton seed business did not perform as expected 

• Vegetables seeds segment picking up

International business

• Q2 – 24% (31%), H1 – 28% (34%)

• Revenues – ₹ 154cr (₹ 217cr), 80% decline due to Metribuzin

• Excluding Metribuzin, margins comparable to last year

• International revenues impacted due to volume decline and price correction in Metribuzin along with impact on contract manufacturing revenues

• Most of products except Metribuzin registered volume growth

• YoY realization decline in most of the products 

• Expect to drive the international business from hereon

• PEKK – no shipments impacted by airline industry, expect demand to be low for the next 2 quarters

• Metconazole – some impact in YoY revenue degrowth 

Capex

• Formulation plant at Dahej – commissioning by March 2021, delay due to Covid issue, new formulations to come out of this plant and also some existing formulations

• MPP at Dahej for AIs – on track, commissioning by Q3FY22E

• Metribuzin Phase II – commissioned and operational, expect to utilize optimally by Q1FY22E

• Committed capex – ₹ 525cr incl. new R&D center of ₹ 800cr of planned capex for next 3-5 years

• Large part of capex for AIs

• Further capex approval of ₹ 70cr for MPP, pilot plant, automation, for new contract manufacturing, additional land for seeds business

• Capex FY21E – ~₹ 150cr, ~₹ 350cr over FY21-22E