Labour issues could hit output; exports to be under pressure; ‘Hold’ maintained
Rallis India’s (Rallis’) Q4FY20 performance was impacted by COVID-19 related disruptions. While top line grew mere 2% y-o-y (excluding COVID-19, 22% y-o-y growth; Rs 790 mn lost sales), Corona’s impact was more pronounced on exports. Also, operating deleverage and certain one-offs (~Rs150 mn) dented margin. Though kharif season’s prospects remain bright, meeting demand could be a challenge given labour issues across key facilities.
Moreover, demand and price overhang on key international products are likely to keep the export business under pressure. Hence, we continue to maintain Hold with TP of Rs 219, valuing the business at 17x FY22E EPS.
Logistic challenges hit growth across business verticals: Disruption caused by COVID-19 impacted manufacturing of products, resulting in ~Rs 160-mn sales loss in the domestic market. Further, international shipments were disrupted due to absence of transportation facilities in the last week of March, leading to lower shipments of products worth Rs 532 mn. Q4FY20 margin was impacted by: a) bad debt provisioning (Rs 40 mn); b) sharp INR depreciation leading to MTM loss of Rs 99 m; and c) Rs 12 mn increase in employee cost on higher actuarial assumptions.
Pricing pressure remains; capacity expansion at Dahej delayed: Rallis’s key products-Pendimethalin and Metribuzin-continue to remain under pressure due to the inventory overhang in US markets. Also, one of the company’s contract manufacturing products is facing issues due to its application in the aerospace business. Rallis has delayed the capacity expansion at Dahej facility by six months amidst the lockdown. Phase II expansion of Metribuzin is likely to be commissioned in June.
Outlook: Exports a concern–Overhang of Metribuzin inventory across US markets along with demand issues for CRAMS products is likely to keep Rallis’ export business under pressure. Moreover, labour concerns across facilities could hit production levels.