Rallis India: weak profitability blunts strong revenues
Investors hoping for a linear earnings recovery after demonetization and the goods and services tax-induced disruptions would do well to take note of Rallis India Ltd’s performance in the December quarter. A favourable base helped the company report double-digit growth in revenues. According to analysts, volume growth was also strong. But the strong revenue growth added nothing to the company’s earnings.
Rather, earnings per share for the quarter dropped 1.5%. Operating profit slumped 11% from a year ago on a sharp contraction in margins. Profitability was hit as Rallis India was unable to fully pass on the rise in raw material costs. “Gross margins contracted by 740bps to 42%, due to the impact of increase in technical (intermediary) prices and the inability to pass on the same,” Dolat Capital Market Pvt. Ltd said in a note (100 basis points equal one percentage point).
The post-results management statement indicated pricing pressure. Prices of technical intermediaries—used as feedstock—have gone up due to tighter implementation of pollution norms in China and the resultant reduction in capacities in the country.
The situation did not turn adverse overnight. But Rallis India’s inability to fully pass on the rise in raw material costs also reflects challenging market conditions in India. Low pest infestation and below-par rains indicate that the domestic market is not supportive of price hikes, says an analyst with a domestic broking firm.
According to HDFC Securities Ltd’s institutional research, Rallis India is likely to raise product prices in the current quarter. But that may provide little support to the current fiscal year’s (FY18) earnings. The fiscal fourth quarter is usually a lean season for domestic agricultural inputs firms. With revenues and operating profit in the first nine months of FY18 increasing just 8% and 3.5%, respectively, the current fiscal year can prove to be a dampener from the earnings perspective. Perhaps tracking the subdued trends, Elara Securities (India) Pvt. Ltd pared its profit estimates for FY18 by about 10%.
While the earnings trends are clearly out of sync with the 18% rise (post the 6% correction on Tuesday) in the Rallis India stock price over the last one year, much depends on the company’s ability to pass on the rise in input costs and the next crop season.
That said, it has to be seen if other listed agrochemical firms will also face Rallis India’s predicament. According to the analyst cited above, other listed firms have premium products in their portfolio which help them withstand market pressures better. The forthcoming quarterly results will test this thesis.
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