PL Stock Report - Rallis India (RALI IN) - Q1FY24 Result Update - Near term challenges likely to persist - Downgrade to 'REDUCE'

Rallis India (RALI IN) - Himanshu Binani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: REDUCE | CMP: Rs221 | TP: Rs180

Q1FY24 Result Update - Near term challenges likely to persist

Quick Pointers:

§ Domestic/exports business de-grew 5%/30% YoY in 1QFY24.

§ Launched 3 new products in CP segment during 1QFY24.

We trim our FY24/25E EPS estimates by 5%2% and downgrade the rating to ‘REDUCE’ (Earlier HOLD) citing 1) slower revenue growth and margin pressure amid delayed uneven distribution of rainfall (till date) and 2) increasing El-nino concerns in 2H of the monsoon season.

Rallis India’s (RALI) 1QFY24 results were better than our and consensus expectations primarily led by better margins. The company highlighted that (a) domestic crop protection (CP) revenue declined by 5% YoY, (b) export revenues were down by 30% YoY, (c) seed revenues were down 2% YoY to Rs2.6bn, (d) gross margins expanded by 260bps YoY to 38.5% led by better product mix, e) EBITDA margins up 100bps YoY to 14.1%, led by lower RM cost and better cost efficiencies, (f) launched 3 insecticides in CP segment and (g) CRAMS gained traction plus PEKK shipments commenced (volumes to pick-up gradually). Citing near term headwinds we downgrade our rating to ‘REDUCE’ (Earlier HOLD) with revised TP of Rs180 from Rs200 earlier based on 16xFY25 EPS (earlier 18XFY25 EPS).

§ Domestic CP business- Impacted from high channel inventory & pricing pressure: Domestic CP business declined 5% YoY to Rs3.8bn primarily due to delayed and uneven distribution of rainfall coupled with high channel inventory. This coupled with oversupply from China has in-turn led to pricing pressure on product prices. Channel inventory continues to be on higher side leaving limited room for further inventory push into the market, while trade is on wait-and-watch mode more likely to purchase closer to consumption. Nevertheless, with recent improvement in rainfall activity (from last week of June’23 onwards), RALI remains confident of improved performance over the subsequent quarter. More so in 1QFY24 the company had also launched 3 insecticides and 1 water soluble fertilizer product.

§ Exports continue to be under pressure (down 30% YoY in 1QFY24): Exports were down by 30% YoY in 1QFY24 primarily led by lower volume growth due to high inventory buildup in key regions coupled with pricing erosion across generic active ingredients. Management indicated that pricing pressure will likely persist for key products like Acephate in Brazil and Hexaconazole in South East Asian markets. Metribuzin and Pendimethalin demand continues to be stable. Further, PEKK shipments have started and are expected to gradually pick up. Going forward, management remained cautious on international market and alluded for demand recovery 2HFY24 onwards.

§ Margin expansion led by declining RM cost and cost efficiencies: RALI’s gross margins expanded by 260 bps YoY to 38.5% primarily led by declining RM cost and better product mix. This coupled with better cost efficiencies have resulted into an EBITDA margin expansion of 100bps YoY to 14.1% (PLe 10.8%). CP and seeds segment EBITDA margin stood at 11.2%/19.8% (+170 bps/ -120 bps YoY). Going forward, we believe margin improvement will likely continue in FY24 primarily led by lower RM price and lower base of FY23.

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