We trim FY18/19ii EPS by 1%/5% to Rs 9.1/10.9 while leaving FY20ii EPS at Rs 14.3 post the Q3 FY18 earnings miss.
We trim FY18/19ii EPS by 1%/5% to Rs 9.1/10.9 while leaving FY20ii EPS at Rs 14.3 post the Q3 FY18 earnings miss. We roll forward our TP to March-19, in the process raising it to Rs 300 (21x FY20ii EPS). Q3 earnings missed estimates due to lower-than-expected margins. Given the softness in the farm economy, the company was unable to entirely pass through a sharp increase in input costs. We understand that the company has taken price increases in December-January, and hopes for improved margins in Q4, but the overall environment remains challenging for the entire industry. Ebitda missed our estimate by 31%, but a tax break on sale of stake in Advinus curtailed the miss on net profit to 13%. The tax rate should normalise going forward.
Positives from the quarter include double-digit volume growth across both domestic and export businesses. However, the outlook for FY19 appears challenging, given demand softness and input cost pressures. The company reports its revenues net of GST with the implementation of GST from July onwards, whereas revenues reported in Q3FY17 are gross of excise duty. On a comparable basis, Rallis’ standalone revenues grew 16.5% y-o, and consolidated revenues grew 18.6% y-o-y.
Volume growth drove around two-thirds of standalone revenue growth, which according to management was fairly even across both the domestic and international businesses. However, an increase in input costs and an inability to completely pass it through to farmers due to difficult domestic market conditions adversely impacted margins, leading to a y-o-y decline in Ebitda despite growth in revenues. The company has taken steps to increase prices in Dec/Jan, which it hopes will help it shore up margins from Q4 onwards, although overall domestic demand remains soft.