Rallis eyes EBITDA margins at 15-20% for FY13

V Shankar, MD & CEO of Rallis India says the profitability of the company was hit by lower use of crop protection products by farmers and erratic rainfall.

The crop protection company of the Tata Group reported drastic net profit decline in the March quarter.

Net profit came in at Rs 9.88 crore against Rs 18.81 crore recorded in the same period last year. Sales were down 13% at Rs 206 crore (Rs 238 crore).

Speaking to CNBC-TV18, Shankar says, business conditions have been tough due to rise in fertiliser prices. The company witnessed shrinkage in margins in Q4. “We hope to maintain EBITDA margins between 15-20% for FY13,” he says.

Rallis, which started operation at Turbhe in 1970s, decided to shut the plant as the surrounding area has developed into residential locality.

The company has three manufacturing facilities in Maharashtra and one in Uttar Pradesh.With acquisition of Zero Waste, Rallis has launched GoGreen, a special type of manure produced with bagasse purchased from sugar mills and proprietary technology.

Going forward, Shankar says, the company plans on entering new geographies in FY13.

Below is an edited transcript of Shankar's interview on CNBC-TV18. Also watch the attached videos.

Q: The fourth quarter was a very tough quarter for the company. Was it just one-off for Rallis India?

A: After the monsoon caught up well around September, we did hope that during the Rabi season it will continue. However, we had an erratic rainfall. Quite a few major states, be it Maharashtra or Andhra Pradesh, went through difficult agriculture conditions and it led to poor yields in some crops. Also, we saw alongside crop prices for some key crops were not as remunerative. Also, some agri input prices had gone up, notably fertilisers. So it is a combination of many things.

The other thing, which is important for our industry, is actual occurrence of pest profile. That was also low this season. All these factors put together made the business conditions much tough.

That was the environment in Q4. Despite this, we clocked over Rs 200 crore of turnover with our net being at Rs 12 crore on standalone basis. If one looks at our performance for the entire year, we grossed over Rs 1300 crore revenue, growth of over 15%. Our EBITDA has also moved up at 11%. We crossed over Rs 210 crore. And though costs had gone up and conditions were tough, we are over 17% EBITDA margin.

The current indications are that monsoon is going to be normal and once sentiment perks up after the initial rounds, things can change in Kharif itself. We do hope that FY13 will turnout to be better.

Q: The real pressure point in Q4 was the domestic business, which saw quite a contraction. What happen in Q4 with regards to the domestic business and you spoke about the monsoon briefly? Give us a sense on how the monsoon is shaping up and whether we can see a recovery going forward within that space?

A: The latest report, which we have heard from the agri ministry, is that it’s going to be normal. We hope to see the details of the forecast very shortly. We have to see the onset of the pre-monsoon charts if there are some smart charts, which perk up the agricultural activity, that itself will be a great impetus to the season.

We will have to wait and watch how it pans out in terms of the onset of the monsoon and the pre-monsoon charts. Also, in terms of the focus on what crops will do well.

It's a bit early now to say, except that we will have to see how farmers sentiment pan out on the cotton crop because it did well last year. The prices, somewhere during the season, did not come up to the expectation of the farmers and sentiment was depressed. We will have to see how the acreage for cotton pans out.

Q: Your international business has done reasonably well. Can you give us some guidance on how it is shaping up for the coming quarters?

A: In terms of the international business globally, last year saw very handsome growth of over 15% compared to almost flat position in the previous two years. In Rallis too our international business has done quite well and for the year the proportion of international revenues was up over 33% of the total.

As per our Apollo growth programme on international business that is the kind of proportion we have been targeting. This has been driven both by the long-term contracts, which we have with strategic alliance customers as well as the contract manufacturing business, has grown during the year.

Internationally, quite a few markets, quite a few countries have driven this growth, Latin America in particular. We do hope that this year also, the kind of conditions for the international business should continue in a similar vein. Therefore, we will also continue to focus on this leg to keep the international business proportion in a similar band for us in Rallis.

Q: What were the utilisation levels, especially at Dahej? What are you expecting by way of utilisation levels in FY13?

A: As I had said earlier, we had planned to ramp up our Dahej capacity during the year. The lines, which are in operation, are going to full capacity. We have achieved that in Q4 and both the lines which are operating there are working quite efficiently onto full capacity.

Going forward into the new year, we are also working on new contracts. As and when it progresses on a positive note, one or two more lines of Dahej will get operational during the year. Therefore, our revenues from contract manufacturing should show an increase during the current year.

Q: In Q4 margins fell considerably to multi-quarter lows. You said it was due to costs pressures but can we see a recovery in FY13 and what sort of levels or margins do you think they would average at?

A: If you look at it by quarters, then in Q4 there has been shrinkage in margins. That is culmination of various factors as I explained earlier about farmers preferring to go for optimising costs and therefore lower value products and so on.

There is also a pricing pressure, where we and the industry have not been able to pass on the full costs on to the pricing. Therefore, more important is how the margin has panned out for this season or the entire year" where there hasn’t been considerable dip compared to the previous year.

Going forward, this year we are working on a number of programmes. One is focusing on our brands and building and taking the right proportion mix so that it delivers the right value. Internally, within the company, we are looking at various cost optimisation measures including focusing further on working capital and inventory levels.

All this should auger well in improving the margin situation. We would like our EBITDA on a healthy level in a 15-20% band. I have no reason to believe that it should not be within this band in the coming year to.

Q: How would FY13 pan out in terms of a mix between volume and margins? Which would you concentrate on?

A: We will go for growth and our intention is always to beat the industry growth and therefore no questions about it. We will go into new markets, new area, work with farmers, new geographies all the time and try and get into market spaces and grow the business.

At the same time we are focusing on greener products and products which create greater value, they are also typically of pricing situation, premium situation which is better in the mix, so it will be mix of both while focusing on the volumes how do we deliver better quality of mix.

So concentration will be on both from the market point of view or farmer point of view. Internally also we look at optimizing our own cost of operations, cost of supply chain so that will also contribute to the margin improvement programme.