PL Stock Report: Rallis India (RALI IN) - Q2FY24 Result Update – Exports likely to exert pressure in the near term - Reduce

Rallis India (RALI IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: REDUCE | CMP: Rs217 | TP: Rs190

Q2FY24 Result Update – Exports likely to exert pressure in the near term

Quick Pointers:

♦ Domestic/exports business de-grew 5%/50% YoY in 2QFY24.

♦ Launched 11 new products in CP segment during 1HFY24.

We trim our FY24/25/26E EPS estimates by 5%9%11% citing 1) slower revenue growth & margin pressure amid delayed uneven distribution of rainfall, 2) increasing El-nino concerns in 2H of the monsoon season and 3) pressure in exports markets led by inventory overhang and lower prices. Rallis India’s (RALI) 2QFY24 results were below our expectations primarily led by subdued performance across business segments. The company highlighted (a) domestic crop protection (CP) revenue declined by 5% YoY, (b) export revenues were down 50% YoY, (c) seed revenues were up 237% YoY at Rs950mn, (d) gross margins expanded 460bps YoY to 38.9% led by better product mix e) EBITDA margins up 360bps YoY to 16.0%, led by lower RM cost and better cost efficiencies, (f) launched 11 products in CP segment in 1HFY24 and (g) CRAMS gained traction plus PEKK shipments commenced (volumes to pick-up gradually). Citing near term headwinds particularly in the exports market, we maintain ‘REDUCE’ rating with revised TP of Rs190 from Rs180 earlier based on 16xFY26 EPS (earlier 16XFY25 EPS).

♦ CP business- Impacted from high channel inventory & pricing pressure: Domestic CP business declined 5% YoY to Rs5.7bn 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. Company also launched 11 products (8-Insecticides, 2-herbicides and 1-fungicides) in 1HFY24.

♦ Exports continue to be under pressure (down 50% YoY in 2QFY24): Exports were down by 50% YoY (Volume/Price decline of 15%/35%) in 2QFY24 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 only after 3QFY24.

♦ Margin expansion led by declining RM cost and cost efficiencies: RALI’s gross margins expanded by 460 bps YoY to 38.9% primarily led by declining RM cost and better product mix. This coupled with better cost efficiencies have resulted into an EBITDA margin expansion of 360bps YoY to 16.0% (PLe 12.6%). CP and seeds segment EBITDA margin stood at +17.3%/+6.3% as against +15.1%/-73.4% in same quarter previous year. 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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