Maintain ‘hold’ on Rallis India with a March 2016 target price of R230 per share valuing the stock at 20x FY17 P/E – five-year average. is developing a strong non-pesticide business which will reduce cyclicality in its business.
However, in the absence of any near-term triggers and given a tepid FY15 and a likely sub-par monsoon, we slash our FY16/FY17 revenue estimates by 16%/15% and PAT estimates by 20%/17%.
Unseasonal rains hurt Rallis’ domestic business. The company reported a second consecutive quarter of revenue decline (-2.8% y-o-y), missing our estimates due to the recent spell of unseasonal rains. Seeds business however saw good traction (+69% y-o-y). The company’s profitability increased on better gross margins.
Rallis’ working capital position worsened. Due to to unseasonal rains and tight liquidity conditions, debtor/inventory days increased by 15/25 y-o-y. Management has guided for improvement in the working capital position going ahead.
India’s pesticide industry saw a tough Q4FY15 due to unseasonal rains, which has led to stretched working capital cycles and high inventory in the system. Also, shortage of urea in the year resulted in tight liquidity conditions in the market. The domestic pesticide industry is estimated to have grown by 0-5% for FY15. Due to a bad season and tight liquidity conditions, both inventory and debtor days increased sharply. However, the company believes this was a one-off with both likely to normalise going ahead.