Rallis - Capex on track, International business showing traction; Q3FY21 Result Update

During Q3FY21, Rallis reported in-line performance despite ₹ 78mn one-time charge on inventories. The company reported volume growth in its Crop Protection segment however pricing pressure continued in some products. 

International Crop Protection business is still reeling under pressure due to pricing issues in some of the products despite demand coming back on track. Seeds business reported volume growth supported by growth in Maize and Bajra, however impacted due to one-off of ₹ 60mn on substandard stocks. Contract manufacturing segment catering to the aviation industry still reported subdued performance due to slowdown in the industry. Subdued performance for the same is expected to continue at least over the next few quarters, however the company is trying to derisk the segment by looking at applications for new user industry. 

Overall, Rallis reported 6.9% YoY rise in top-line at ₹ 5.7bn (₹ 5.3bn), EBITDA margins remained stable YoY at 10.5%. EBITDA too rose in line with top-line growth at 7.9% YoY from ₹ 604mn to ₹ 557mn. During the quarter, the company had one-off charge of ₹ 78mn on account of substandard inventories while on the other hand had exceptional income of ₹ 61mn on profit on sale of flats. Management indicated that Metribuzin volume have been picking up from Q3 while pricing still remains subdued at an average of ₹ 1,300/ kg for 9MFY21 from ₹ 2,100/ kg for 9MFY20. 

Rallis continued its product launches with one 9(4) seed treatment product, a crop nutrition product for grapes, and ventured into biopesticide segment with launch of 2 new products. The company’s capex plan is on track with newly announced investment of ₹ 650mn for a new MPP at Dahej. Based on 9MFY21 performance we have slightly modified our estimates with introduction of FY23E estimates. We continue to maintain ‘Buy’ with a revised price target of ₹ 352 (earlier ₹ 316).

Volume growth in Domestic crop protection business: Rallis’s domestic crop protection segment reported ~5% YoY growth at ₹ 5.3bn (₹ 5.0bn), supported by 10% YoY volume growth and price correction of 5%. International Crop protection business declined 7% YoY yet the company witnessed volume growth in some of the Ais. Seeds segment reported healthy 37% YoY revenue growth at ₹ 410mn (₹ 300mn) supported by volume growth in Maize and Bajra.

Volume growth in International business: During Q3FY21, international business reported flattish YoY revenues at ₹ 1.8bn benefitted from significant volume growth yet impacted by pricing pressure. Contract manufacturing suffered due to demand issues for PEKK (catering to aviation industry). Nonetheless, demand from volume perspective is good however prices are still under recovery mode.

New capex announced for MPP, ongoing capex on track: Rallis announced new investment of ₹ 65omn for a new MPP at Dahej which will cater to the exports market. Capacity expansion of Metribuzin, Hexaconazole, and Kresoxim Methyl was completed in Q3 while capacity expansion for Acetamiprid, & Lambda Cyhalothrin is expected to be completed by April 21. Overall FY21E capex is likely to be ~₹ 1.5bn while FY22E is expected to witness higher cash outflows.

Expansion story to play out once market stabilizes: Rallis reported in-line performance in Q3 while Q4 is expected to be in-line too. However, management cited that Covid impacted businesses are slowly coming back on track which is expected to benefit future performance. Simultaneously, ongoing capexes are expected to add to incremental revenues and profits of the company. We believe Rallis is well placed to take the opportunity in agrochemicals space with its massive ₹ 8bn capex plan. We have introduced FY23E and roller over our valuations to FY23E.The stock is currently available at 23.4x and 20.6x FY22E and FY23E EPS of ₹ 12.3 and ₹ 14.1 respectively. We continue to maintain ‘Buy’ with a revised price target of ₹ 352 valuing the stock at 25.0x FY23E earnings.

Q3FY20 concall highlights

Q3 Financial Performance – One-time charge on seed inventories, gain from sale of flats

• Cash flow from operations – ₹ 201cr

• WC days improvement – 79days (83)

• High Inventories – RM stocking in anticipation of increase, Metribuzin inventories due to plant reshuffling

• Lower receivables days – 73days (97days)

• Extremely volatile RM prices in Q3 – tried to take pricing action for the same, increased prices in some while corrected in some

• One-time charge – ₹ 7.8cr on account of substandard seed stocks and non-moving items

• Exceptional item – ₹ 6.1cr Profit on sale of flats

Business developments – Metribuzin volume up, prices improving since past 2-3 months, PEKK under pressure

• Two 9 (3) products to be launched p.a. for the next couple of years

• Introduced Soybean herbicide – co-marketed product

• Hexaconazole – debottlenecking completed in 1HFY21

• Metribuzin

o Volumes – picking up from Q3, 15% global market share

o Pricing – Improving in past 2-3 months, 9MFY21 – ~40% YoY decline from ₹ 2,100/ kg to ₹ 1,300/ kg

o Reshuffling equipments to make a single plant for Metribuzin during Feb-Apr period, coinciding with the maintenance shutdown in April

o Building up Metribuzin inventories

• PEKK – demand continue to remain soft as catering to only aviation sector, should start normalising in one-year things, trying to look at other sectors to derisk from aviation segment

• Dahej WDG formulations capacity addition in FY20 – started utilising from Q3 onwards 

New product launches – Continued across 9 (4), crop nutrition, and entry into biopesticides

• Launched new 9(4) formulation in Q3 – Trot (Thiamethoxam FS) for seed treatment insecticide for Cotton, Soybean, Chilli, Sorghum, Wheat, Okra, Maize, Sunflower, and Groundnut

• Registrations – Acephate 75% SP by Health Ministry ANVISA, Brazil and Metalaxyl Techical in Paraguay

• Successful launch of Aquafert – Grapes (FNP) in Crop Nutrition category

• Entered into biopesticide segment with launch of 2 new products – Ralli-Neem and Ralli-Neem+

Domestic Crop Care business – Supported by volume growth, pricing alignment in some products, yet impacted by international business

• Crop care segment revenues – ₹ 529cr (₹ 503cr), 10% YoY volume growth, price correction of 5%

• Domestic crop protection – ₹486cr (₹ 451cr)

• International business – 7% QoQ decline, however volume growth in some major AIs

• Expect sector growth at 10-11% in current fiscal

• EBITDA – ₹ 82cr (₹ 67cr) margin increase due to gross margins improvement, PAT – ₹ 61cr (₹ 46cr) includes gain from sale of assets

Metahelix Seeds – Volume growth in Q3, gross margins under pressure, onetime charge of ₹ 6cr

• Revenues – ₹ 41cr (₹ 30cr), 37% YoY growth, satisfactory performance 

• Seeds grew by 38% mainly due to volume growth in Maize & Bajra

• Better price realisation in Maize, Paddy, Bajra

• EBITDA – loss of ₹ 22cr (loss of ₹ 11cr) due to decline in gross margins, one-time charge of ₹ 6cr on substandard stocks

• Hybrid maize reached ₹ 100cr milestone, hybrid rice already in ₹ 100cr+ category

• R&D focus – cotton, Rabi Maize, vegetables

International Business – Volume growth yet pricing under pressure, demand continues to recover

• Revenues – ₹ 184cr (₹ 182cr), significant volume growth impacted by pricing under pressure

• Contract manufacturing – ₹ 30cr (₹ 78cr), expect similar/ subdued performance in next year

• Demand – Good from volume perspective, pricing still recovering 

Capex – Approved new MPP investment at ₹ 65cr

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

• Newly announced investment at ₹ 65cr – for a new MPP at Dahej SEZ, not for contract manufacturing, for exports

• 9MFY21 – ₹ 90cr, ₹ 40-45cr outflow in Q4

• Capacity Expansion of Metribuzin, Hexaconazole, and Kresoxim Methyl – completed in Q3

• Capacity expansion for Acetamiprid, & Lambda Cyhalothrin – to be completed by April 21 

• FY22 – Expect larger cash outflow towards capex

• Lambda cyhalothrin – no risk expected as witnessed in Metribuzin

• Capex break-up

o Formulation – ₹ 100-110cr

o MPP – ₹ 124cr, commissioning in 2HFY22E 

o R&D – ₹ 90cr

o Hexaconazole, acetamiprid etc. – ₹ 65-70cr

o Metribuzin – ₹ 30-35cr

o Land grading, infra etc. – ₹ 15-20cr (not for capacity addition)

• 9MFY21 ITI – 12% (FY20 full year – 15%), expect to cross last year number in FY22E

• Returns on new investment – Investments based on IRR and not on asset turnover