Rallis India: investor expectations run high
Driving the Rallis India stock is the expectation of an earnings turnaround, helped by a good monsoon forecast and a revival in farming activity
Rallis India Ltd’s share has gained 2% after the company reported sales growth following three consecutive quarters of declining growth.
Sales in the March quarter increased 9% on higher exports at the Tata group firm. With the recent gains, the stock is up 30% in two months.
Driving the stock at the maker of agricultural products is the expectation of an earnings turnaround, helped by a good monsoon forecast and a revival in farming activity.
Last fiscal year, poor rains affected demand and sales fell by 10%. A good monsoon should benefit the agrochemical and seeds businesses, but the firm’s earnings may not see the full benefits. First, its overseas business is yet to fully recover. Some of its March quarter exports are deferred contracts from earlier quarters, which materialized now. Brazil, one major export market, continues to reel under sluggish demand.
“While in Q4FY16 export orders have seen a revival, management remains cautious on recovery in Brazil which could take more than a couple of quarters. This would likely keep exports business revenue under pressure,” Emkay Global Financial Services Ltd said in a note. Last fiscal year, 30% of the firm’s revenues came from overseas or exports.
Rallis made good progress in the contract manufacturing business. The management told analysts it took up two projects on a pilot basis and hopes to convert them into commercial contracts this fiscal year. The revenue generation potential of these projects is not known. But a meaningful impact on Rallis’s earnings can be felt only from the next fiscal year.
“In our opinion, CRAMS ramp-up could happen in FY18E, but FY17E doesn’t look to be very exciting from CRAMS per se,” a domestic broking firm said in a note. CRAMS is short for contract research and manufacturing services.
In India, Rallis is focusing on protection for fruits and vegetables, a business which is seeing good growth. But two consecutive years of poor monsoon have driven up inventories. This may delay sales recovery and put pressure on prices in the coming crop season. “A good monsoon would push up domestic crop protection demand, but high system inventory may result in pricing pressure and hurt profitability,” Religare Capital Markets Ltd said in a note.
Overall, expectations are running high for Rallis. Even though it ended 2015-16 on a better note, there is no certainty that earnings will see a linear recovery. The turnaround expectations have driven up the stock valuations—trading at 21 times the current fiscal year’s earnings estimates. Any untoward events such as poor rains or a delay in earnings recovery can shave off the recent gains.
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