Rallis India: slow start to a promising year

A favourable base and conducive environment was expected to help Rallis India post good sales growth, but a delay in crop sowing weighed on sales


Consolidated operating profit at Rallis India jumped 26% as expenses remained under check.
Consolidated operating profit at Rallis India jumped 26% as expenses remained under check.

The slow initial progress of the monsoon and the subsequent delay in crop sowing weighed on Rallis India Ltd’s performance in the June quarter. Standalone sales net of excise duty rose just 1%. The seeds business grew 15%, pushing consolidated sales growth to 7%.

Still, sales trailed Street estimates. A favourable base and conducive environment for agriculture was expected to help Rallis post good sales growth. But as it turns out, the delay in crop sowing weighed on sales.

Even the seeds business lagged estimates. Bt cotton seeds is one of the key products of the seeds business. A drop in acreage of this crop—down 13% as of last week—seems to have slowed sales.

“This (slow onset of rains) impacted the progress of the season which was accentuated by a sharp drop in cotton planting. Consequently, demand and placement was muted during Q1 which has picked up in July,” V. Shankar, managing director and chief executive officer, Rallis India, said in a statement.

Analyst estimates were based on year-ago numbers, making comparisons inaccurate. But even if one looks at the restated numbers based on the new accounting standards (Ind-AS), the standalone sales growth of 1% is unexciting.

One area where Rallis did well is on operating parameters.

Consolidated operating profit jumped 26% as expenses remained under check. Earning before interest, taxes, depreciation and amortization (Ebitda) margin expanded 2.5 percentage points. Finance costs dropped sharply on better inventory management. The strong operating show may help investors overlook the sales miss. Also, it is not completely unexpected. Over the past month, channel checks by broking firms have been pointing to weak sales in Q1, making investors cautious. The stock has lost 5% since the beginning of July against a 3.5% gain for the BSE 500 index.

That said, the bets are still on Rallis. The stock is still up 30% from 22 January, or in the past six months. With the monsoon covering all of India now, demand and product placements are seeing traction. The key now is sustainability.

According to Emkay Global Financial Services Ltd, subdued sales in Q1 piled up inventories in the market. If these do not get cleared in the next few weeks, companies will have little headroom to push sales, bringing them back to square one.

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