Rallis India: sober December quarter tempers growth expectations
Rallis India Ltd beat Street estimates in the December quarter (Q3). Revenues increased 7.5%. As raw material costs as a percentage of sales dropped, margins expanded, resulting in a 17% rise in operating profit. Thanks to high other income and low finance costs, net profit grew at an even faster pace of 30%.
But the performance is nothing to be excited about. One, it comes on a favourable base—sales in Q3 of the last fiscal year were down 20%. Two, the December quarter also reflects spillover sales of the summer crop season which got extended due to dry spells. Three, the revenue beat comes on tempered-down earnings estimates, especially after a subdued first half and note ban-induced liquidity problems.
Still, the company did reasonably well, given the challenges such as pricing pressures and unfavourable climatic conditions. According to Rallis, the huge shortfall (62% deficit) in northeast monsoon (which occurs in October-December) impacted the southern states, affecting the sowing of paddy and coarse cereals. As a consequence, revenues at the seeds division fell from the year-ago quarter.
But thanks to higher crop acreages, up 6% as of the past week, and heightened marketing efforts, Rallis managed to register better sales. According to Emkay Global Financial Services Ltd, volumes were higher in the domestic business, though realizations came under pressure.
Including the December quarter, revenues so far this fiscal are up about 12%. In the previous fiscal year till the December quarter, they fell 14%. So, 2016-17 has been a better year for Rallis. But the growth is not as strong as the initial forecasts.
With winter crop sowing (rabi) also getting elongated, analysts expect Rallis to see some kind of spillover sales in the current quarter also. But considering that a major crop season (kharif) ended with subdued growth, a significant jump in sales is unlikely unless exports pick up drastically. This dawning realization is leading to a reduction in estimates as many analysts had forecast 2016-17 to be even better. “We cut our FY17/18 revenue estimates by 8% each to factor in lower-than-anticipated growth in 9MFY17,” Emkay said in a note. “Our FY17 EPS (earning per share) remains unchanged as the company has been receiving higher other income due to increase in current investments resulting from gain on sale of land.”
Demonetization is expected to stretch working capital due to a delay in collections. But key to the Rallis stock, which is trading at 20 times one-year forward earnings estimates, is growth. It is crucial the company maintains the growth tempo in Q4. While agriculture climatic conditions for the next fiscal year will be closely tracked, any slippages in growth expectations will make valuations frothy.