Rallis India (RAIL), a Tata Group company, is the second largest player in the domestic Pesticide market.
The company had undertaken a restructuring exercise post FY2004, which resulted in RAIL clocking all-time high EBITDA Margins in FY2009.
Going ahead, we expect Contract Manufacturing (CM) to drive the company’s next level of growth particularly with its new plant coming on stream by June 2010.
We estimate RAIL to register a CAGR of 14% and 24.3% in Net Sales and Profit over FY2009-11E, respectively.
At Rs735, the stock is trading at 8.9x FY2011E Earnings and 5.4x FY2011E EV/EBITDA. Historically, RAIL has traded in the 3-11x one-year forward PE band, and at an average 8x over the last couple of years.
Going ahead, on account of improving Return Ratios and higher Net Profit growth, we expect the stock to trade at higher valuations than its historical average.
We initiate coverage on the stock with an ACCUMULATE rating and target price of Rs796.