Rallis India: steep fall in share price provides no comfort

Although analysts are more positively inclined towards the shares following the recent correction, investors should wait for more concrete signs of a turnaround


The company’s performance in the December quarter trailed Street estimates by a wide margin. Photo: Hindustan Times
The company’s performance in the December quarter trailed Street estimates by a wide margin. Photo: Hindustan Times

Shares of Rallis India Ltd are back to where they were before the company’s earnings were announced. The stock, which lost 5% after the results announcement, recouped the losses in the last two trading days. Belief that the earnings have bottomed out has helped the stock rebound; it has lost more than a quarter of its value last year.

The company’s performance in the December quarter trailed Street estimates by a wide margin. Stand-alone revenue and net profit dropped by around a fifth each on low demand for agrochemicals and sharp drop in exports.

The belief that earnings will rebound is predicated on some deferred export orders materializing in the current quarter, which should support revenues. In any case, successive quarters of revenue decline have made the base more favourable; stand-alone revenues have dropped for five consecutive quarters now. But if one expects the earnings to rebound only because the company has seen successive bad crop years, then the optimism is misplaced.

Exports currently contribute only a third of revenues. For the rest, Rallis India continues to depend on the domestic market which is struggling to cope with high product returns and erosion in prices.

Another agricultural inputs provider Coromandel International Ltd has told analysts that the agrochemical industry saw product returns as high as 20% in the recent season.

Still, the Rallis India management and analysts expect market conditions to normalize, helped by the expectation of better rains in the coming season.

Reports indicate that the El Niño weather phenomenon which increased temperatures and resulted in erratic rains may end this year. While the weather pattern may change, as of now there is no certainty that India will receive good rains. It is also not yet clear when the company’s high inventories will be liquidated. If monsoon plays truant again, companies will have limited opportunities to push sales and the overhang of inventories may remain.

This lack of clarity is making some analysts sceptical about an earnings recovery. “There is limited visibility on the timing and extent of an earnings recovery,” IIFL Institutional Equities said in a note. It added that the company’s shares are trading at 18 times estimated fiscal 2017 earnings, which is not cheap.

“Consequently, although we are more positively inclined towards the shares following the recent correction, we prefer to wait for more concrete signs of a turnaround to adopt a more constructive stance,” it said.

The writer does not own shares in the above-mentioned companies.

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