Margins are likely to be under pressure; FY20/21e EPS down 15/9%; TP revised to Rs 154.
Rallis India (Rallis) reported weaker-than-expected Q2FY20 results, marked by a sharp contraction in gross margin. That said, a favourable demand scenario in International Business (IB; up 31% y-o-y) supported overall top-line growth (up 15% y-o-y). The domestic situation continues to be uncertain due to the erratic monsoon this year. Profitability on the whole is affected by a spurt in input prices due to a disruption in China and keener competitive intensity in domestic and international businesses.
Going forward, margins are likely to remain under pressure given the weak industry outlook. We are, hence, trimming FY20e/21e EPS by 15%/9% while rolling forward the numbers to December 2020. Maintain Hold with a revised target price of Rs 154.
Exports remain key trigger
Rallis reported decent 15% y-o-y growth in consolidated revenue driven by a 31% y-o-y jump in international business segment revenue. The boost thereof is largely attributable to favourable demand for molecules such as Metribuzin and Acephate. On the domestic front, challenges stem from the erratic monsoon that dampened prospects for the kharif season. The domestic business reported a 6% y-o-y growth in revenues with volumes growing 4% y-o-y. Prospects for Rabi season, however, remain better, given the adequate water levels. Besides, the spike in raw material prices coupled with increased competitive intensity impacted gross margin (down ~600bps y-o-y), with Ebitda margins also contracting ~300bps y-o-y (Ebitda down 4% y-o-y).
New products & capex to drive growth
Rallis launched two products (Zygant and Ayaan) pertaining to the paddy crop in FY20. Management believes each holds revenue potential of Rs 3 bn-plus. While capex remains on track, we believe scaling up the export business and success of the newly launched products remain the key growth vectors in the near future.
Outlook: Waiting for execution
We believe margins are likely to remain under pressure going forward amid increased competitive intensity and weak industry outlook. Maintain Hold.