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Agrochemicals / Result Update

India Research

Rallis India

CMP: ` 122 TP: ` 123 Reduce

Rallis Q4FY12 results are disappointing. Deceleration in domestic

business impacts profitability. Opts for tighter control on receivables.

Rallis India’s topline for the quarter declined by 12.1% YoY to ` 2.16bn, reflecting

the slowdown in domestic business. Factors such as poor acreages, preference

towards low-value molecules and high inventory in the market have together

affected its performance. The management has opted for tighter control on

receivables than chasing sales growth in an unfavourable market environment.

Paddy and cotton, key crops for Rallis, continue to witness low pest incidence.

This is one of the reasons its Innovation Turnover Index has slipped lower to

11.4% (against historic average of +20%). Arguably, Applaud and Takumi – two

flagship brands have not been considered during the period.

Dahej facility (two blocks) is running at its optimum capacity. Consequently,

exports (own registered products) have reported healthy growth and account

for one-third of the business.

Consolidated EBITDA margins declined by 660bps YoY to 5.7% mainly on

account of increase in other expenses and employee costs. Raw material costs

inched up 40bps YoY at 58% of sales. Metahelix recorded loss of ` 8mn at

EBITDA level.

Interest costs increased to ` 28mn (up 16.9% YoY). Depreciation also jumped

by 68.8% YoY to ` 87mn with further capitalization of the Dahej facility.

Q4FY12 Result (` mn)

DOLAT CAPITAL

High Points

• Results impacted by

slowdown in domestic agri

biz.

• Tighter control on

receivables management.

• Has launched 10 new

products in FY12.

• Dahej near its peak

capacity utilization.

• We recommend Reduce on

the stock with revised

target price of `123.

Scrip Details

Equity

` 194mn

Face Value ` 1/-

Market Cap

` 23.7bn

USD 484mn

52 week High / Low ` 186 / 114

Avg. Volume (no) 155,630

BSE Sensex 17,207

NSE Nifty 5,223

Bloomberg Code

RALI IN

Reuters Code

RALL.BO

Particulars Q4FY12 Q4FY11 YoY (%) FY12 FY11 YoY (%)

Net Sales 2057 2385 -13.7 12452 10657 16.8

Other Operating Inc. 103 72 296 206

Income from Operations 2160 2457 -12.1 12749 10863 17.4

Other Income 26 45 69 123

Total Income 2186 2502 -12.6 12817 10986 16.7

Other Expenses 577 563 2292 1883

Total Expenditure 2036 2155 -5.5 10622 8948 18.7

PBIDT 150 348 -56.8 2195 2038 7.7

OPM (%) 5.7% 12.3% 16.7% 17.6%

Interest 28 24 16.9 146 37 291.2

PBDT 122 324 -62.2 2049 2001 2.4

Depreciation 87 52 68.8 287 171 67.8

PBT 35 272 -87.0 1763 1830 -3.7

Tax 57 102 -44.1 487 581 -16.1

Profit After Tax (before EOI) -22 170 -112.9 1276 1249 2.1

Cessation cost - Turbhe Operations -71 0 172 0

Forex Losses/ (Gains) -44 -22 97 -15

EOI -115 -22 269 -15

Minority Interest -6 4 15 4

PAT 99 188 -47.5 992 1260 -21.3

Adj. PAT (after MI) -16 166 -109.5 1234 1245 -0.9

Financials (Consolidated)

Year Net Sales# Growth-% EBITDA OPM% Adj. PAT* Growth-% EPS(`) Growth-% PER(x) ROANW-% ROACE-%

FY11 10,863 20.6 1,915 17.6 1,245 22.7 6.4 22.7 19.1 26.8 35.2

FY12 12,749 17.4 2,126 16.7 1,234 (0.9) 6.3 (0.9) 19.2 23.3 28.4

FY13E 14,812 16.2 2,558 17.3 1,475 19.6 7.6 19.6 16.1 24.6 29.6

FY14E 17,258 16.5 3,104 18.0 1,847 25.2 9.5 25.2 12.8 26.0 32.2

Figures in ` mn; # Includes other operating income; * Adjusted for extraordinary items

Sr. Analyst: Bhavin Shah

Associate : Hardick Bora

Tel : +9122 4096 9731 Tel : +9122 4096 9748

E-mail: bhavin@dolatcapital.com E-mail: hardickb@dolatcapital.com

April 25, 2012


India Research

DOLAT CAPITAL

Exceptional items include a) gain of ` 71mn on reversal of cessation cost towards

discontinuation of operations at Turbhe facility and b) forex gain of ` 44mn.

The company reported a net loss of ` 16mn (excl. exceptional items), down from `

166mn profit in Q4FY11. Metahelix recorded a net loss of ` 19mn.

Rallis has acquired 51% stake in Zero Waste Agro Organics Pvt. Ltd. (organic

manure and soil conditioners.) through an all-cash deal of ` 290mn. This business

is expected to reach revenue of ` 1bn over the next five years.

We have lowered our FY13E/FY14E earnings estimate by 14%/10.5% respectively

to factor in for slowdown in domestic business and shrinkage in operating margins.

Likely upward revision of MSPs and a favourable Kharif season stands crucial

for a turnaround in domestic agrochem industry. Scale-up in revenues from

its seeds business (Metahelix) and Dahej facility are key growth drivers.

Financial highlights

Rallis India’s topline for the quarter declined by 12.1% YoY to ` 2.16bn, reflecting

the impact of poor acreages, preference towards low-value molecules and high

inventory in the market.

• Exports have reported healthy growth for FY12 and stood at ` 4bn, accounting

for one-third of the business.

• Consolidated EBITDA margins declined by 660bps YoY to 5.7%, mainly on

account of higher other expenses at 26.7% (+380bps YoY) and employee cost

at 9.6% (+240bps YoY) of sales. Raw material costs also stood marginally

higher at 58% of sales (+40bps YoY). Metahelix recorded loss of ` 8mn at

EBITDA level.

• Interest outgo during the quarter stood higher at ` 28mn (up 16.9% YoY).

Depreciation also jumped by 68.8% YoY to ` 87mn with increased capitalization

of the Dahej facility.

• Exceptional items include a) gain of ` 71mn on reversal of cessation cost towards

discontinuation of operations at Turbhe facility and b) forex gain of ` 44mn.

• The company reported a net loss of ` 16mn (excl. exceptional items) against

profit of ` 166mn in the corresponding period last year. Metahelix recorded a

net loss of ` 19mn.

Analysts meet: Key takeaways

• Monsoons continued their erratic pattern throughout the Rabi season. Moreover,

pest incidence has been the lowest for paddy and cotton which are key crops

for Rallis. Given the unfavorable business environment, the management realigned

its efforts towards shortening the collection periods and easing the working

capital stress. Debtors are lower by 3% YoY at `1035mn on 17% topline growth.

• The annually disclosed innovation index, which indicates performance of Rallis

new launches, stood at 11.4% below the benchmark 20%. The management

indicated that the recent launches included a few high-priced premium products

which experienced slow off-take given the farmers reduced propensity to spend.

Low pest incidence, preference towards low priced products and exclusion of

its two key products – Applaud and Takumi led to a lower figure. The management

appears confident of a turnaround during the course of the year.

Rallis India April 25, 2012

2


India Research

DOLAT CAPITAL

• Dahej facility is running close to its optimum capacity, resulting in a healthy

growth in exports. Two blocks are currently operational and there is additional

land available for future expansion. The company is in talks for CRAMS projects

and currently its owned registration exports are doing well.

• In all, 10 products were launched in FY12 (nil in Q4); of which four were herbicides,

three were insecticides, two were fungicides and one was a plant growth nutrient

(PGN).

• Revenue contribution is the highest from South India, followed by the Eastern

and Northern region, in that order.

• The company has discontinued red molecules in its portfolio – currently consisting

of 52% blue, 30% green and 18% yellow molecules.

• Metahelix business growth is largely led by its hybrids portfolio. The company

has launched 9 new hybrids during the year.

Rallis has acquired 51% stake in Zero Waste Agro Organics Pvt. Ltd. through

an all-cash deal of ` 290mn. The company manufactures organic manure and

soil conditioners. We believe this acquisition appropriately complements its

product portfolio. This business is expected to reach ` 1bn over the next five

years.

• The management has guided Capex of ` 400mn – ` 500mn for FY13E.

Revised Estimates

Particulars (In ` Mn) Revised* Earlier Change %

FY13E FY14E FY13E FY14E FY13E FY14E

Sales 14,812 17,258 16,152 18,824 -8.3 -8.3

EBITDA 2,558 3,104 2,897 3,423 -11.7 -9.3

EBITDAM% 17.3% 18.0% 17.9% 18.2%

PAT 1,475 1,847 1,715 2,064 -14.0 -10.5

* Adjusted for deceleration in revenues from domestic biz, factored in lower EBITDA margins

Valuation

We expect revenue growth from domestic market to moderate in the near term.

Increased cultivation costs and low pest incidence has led to deceleration in volume

off-take.

The upcoming Kharif season shall be an important determinant for future growth in

domestic agro business. Scale-up in Metahelix business and increased contribution

from exports in the interim are growth drivers.

At CMP, the stock trades at 16.1x FY13E and 12.8x FY14E earnings. We believe

there is limited upside from these levels and recommend Reduce on the

stock, with revised target price of ` 123 (13x FY14E EPS).

Rallis India April 25, 2012

3


India Research

INCOME STATEMENT

13.9

24.0

11.0

Rallis India April 25, 2012

51.1

Promoter FIIs DII Public / Others

` mn

Particulars Mar11 Mar12 Mar13E Mar14E

Net Sales 10,657 12,452 14,552 16,998

Operating Income 206 296 260 260

Income from Operations 10,863 12,749 14,812 17,258

Non Operating Income 123 69 30 30

Total Income 10,986 12,817 14,842 17,288

Total Expenditure 8,948 10,622 12,254 14,155

EBIDTA (Excl. Other Income) 1,915 2,126 2,558 3,104

EBIDTA (Incl. Other Income) 2,038 2,195 2,588 3,134

Interest 37 146 134 101

Gross Profit 2,001 2,049 2,454 3,032

Depreciation 171 287 352 429

Profit Before Tax & EO Items 1,830 1,763 2,102 2,603

Extra Ordinary Exps/(Income) (15) 269 0 0

Profit Before Tax 1,845 1,494 2,102 2,603

Tax 581 487 614 731

Net Profit 1,264 1,007 1,488 1,872

Minority Interest 4 15 13 25

Net Profit after Minority Interest 1,260 992 1,475 1,847

Adjusted Net Profit (excl. EO) 1,245 1,234 1,475 1,847

BALANCE SHEET

Particulars Mar11 Mar12 Mar13E Mar14E

Sources of Funds

Equity Capital 194 194 194 194

Share Premium 879 879 879 879

Other Reserves 3,975 4,456 5,388 6,647

Net Worth 5,049 5,530 6,462 7,720

Secured Loans 1,087 1,265 1,070 700

Unsecured Loans 85 241 270 270

Loan Funds 1,172 1,506 1,340 970

Minority Interest 21 15 13 25

Deferred Tax Liability 32 131 131 131

Total Capital Employed 6,275 7,182 7,946 8,846

Applications of Funds

Gross Block 4,057 6,265 6,865 7,665

Less: Accumulated Depreciation 1,743 2,029 2,381 2,810

Net Block 2,314 4,236 4,484 4,855

Capital Work in Progress 1,695 0 0 0

Goodwill on Consolidation 1,236 1,533 1,533 1,533

Investments 256 227 227 227

Current Assets, Loans & Advances

Inventories 2,289 2,717 3,190 3,726

Sundry Debtors 1,064 1,035 1,236 1,490

Cash and Bank Balance 146 112 123 163

Loans and Advances 1,154 1,358 1,508 1,658

Other Current Assets 13 8 8 8

sub total 4,666 5,230 6,064 7,045

Less : Current Liabilities & Provisions

Current Liabilities 3,306 3,422 3,619 4,026

Provisions 586 622 743 789

sub total 3,891 4,045 4,363 4,814

Net Current Assets 774 1,185 1,701 2,231

Total Assets 6,275 7,182 7,946 8,846

E-estimates

Shareholding Pattern as on Mar'12 (%)

IMPORTANT RATIOS

DOLAT CAPITAL

CASH FLOW

Particulars Mar11 Mar12 Mar13E Mar14E

Profit before tax 1,830 1,763 2,102 2,603

Depreciation & w.o. 171 287 352 429

Net Interest Exp 37 146 134 101

Direct taxes paid (581) (487) (614) (731)

Chg. in Working Capital (525) (445) (505) (489)

(A) CF from Opt. Activities 932 1,263 1,469 1,914

Capex (1,540) (514) (600) (800)

Free Cash Flow (608) 749 869 1,114

Inc./ (Dec.) in Investments 1,146 29 0 0

Other (Bal.fig) (1,178) (502) (15) (58)

(B) CF from Investing Activities (1,571) (987) (615) (858)

Issue of Equity/ Preference 65 0 0 0

Inc./(Dec.) in Debt 1,091 334 (166) (370)

Interest exp net (37) (146) (134) (101)

Dividend Paid (Incl. Tax) (453) (498) (543) (543)

(C) Cash Flow from Financing 666 (310) (843) (1,015)

Net Change in Cash 27 (34) 11 40

Opening Cash balances 119 146 112 123

Closing Cash balances 146 112 123 163

E-estimates

Particulars Mar11 Mar12 Mar13E Mar14E

(A) Measures of Performance (%)

Contribution Margin

EBIDTA Margin (excl. O.I.) 17.6 16.7 17.3 18.0

EBIDTA Margin (incl. O.I.) 18.8 17.2 17.5 18.2

Interest / Sales 0.4 1.2 0.9 0.6

Gross Profit Margin 18.8 16.5 16.9 17.8

Tax/PBT 31.5 32.6 29.2 28.1

Net Profit Margin 11.6 7.8 10.0 10.7

(B) As Percentage of Net Sales

Raw Material 58.3 58.3 57.5 56.7

Employee Expenses 6.7 7.1 7.2 7.3

Other Opearting Expenses 17.3 18.0 18.0 18.0

(C) Measures of Financial Status

Debt / Equity (x) 0.2 0.3 0.2 0.1

Interest Coverage (x) 54.6 15.0 19.3 30.9

Average Cost Of Debt (%) 6.0 10.9 9.4 8.8

Debtors Period (days) 36.4 30.3 31.0 32.0

Closing stock (days) 78.4 79.6 80.0 80.0

Inventory Turnover Ratio (x) 4.7 4.6 4.6 4.6

Fixed Assets Turnover (x) 2.6 2.0 2.1 2.2

Working Capital Turnover (x) 13.8 10.5 8.6 7.6

Non Cash Working Capital (` Mn) 628 1,073 1,579 2,067

(D) Measures of Investment

EPS (`) (excl EO) 6.4 6.3 7.6 9.5

EPS (`) 6.5 5.1 7.6 9.5

CEPS (`) 7.4 6.6 9.4 11.7

DPS (`) 2.0 2.2 2.4 2.4

Dividend Payout (%) 30.9 43.1 31.6 25.3

Profit Ploughback (%) 69.1 56.9 68.4 74.7

Book Value (`) 26.0 28.4 33.2 39.7

Adj.RoANW (%) 26.8 23.3 24.6 26.0

RoACE (%) 35.2 28.4 29.6 32.2

RoAIC (%) (Excl Cash & Invest.) 28.5 26.0 28.2 30.8

(E) Valuation Ratios

CMP (`) 122 122 122 122

P/E (x) 19.1 19.2 16.1 12.8

Market Cap. (` Mn.) 23,725 23,725 23,725 23,725

MCap/ Sales (x) 2.2 1.9 1.6 1.4

EV (` Mn.) 24,752 25,120 24,943 24,532

EV/Sales (x) 2.3 2.0 1.7 1.4

EV/EBDITA (x) 12.9 11.8 9.7 7.9

P/BV (x) 4.7 4.3 3.7 3.1

Dividend Yield (%) 1.6 1.8 2.0 2.0

E-estimates

4


India Research

DOLAT CAPITAL

Intentionally Left Blank

Rallis India April 25, 2012

5


DOLAT CAPITAL

BUY Upside above 20%

ACCUMULATE Upside above 5% and up to 20%

REDUCE Upside up to 5%

SELL

Negative Returns

Analyst Sector/Industry/Coverage E-mail Tel.+91-2-4096 9700

Amit Khurana, CFA Director - Research amit@dolatcapital.com 91-22-40969745

Amit Purohit FMCG & Media amitp@dolatcapital.com 91-22-40969724

Bhavin Shah Pharma & Agro Chem bhavin@dolatcapital.com 91-22-40969731

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Priyank Chandra Oil & Gas priyank@dolatcapital.com 91-22-40969737

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Dhaval S. Shah Engineering & Capital Goods dhaval@dolatcapital.com 91-22-40969726

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