Rallis India Ltd has acquired a 53.5% stake in Bangalore-based Metahelix Life Sciences Pvt. Ltd, a seeds research firm, for 99.5 crore. The acquisition is structured as an all-cash deal, largely funded through internal accruals. In addition, Rallis would subscribe to additional equity worth 25 crore in Metahelix, which would increase its stake to 59.02% on the fully diluted equity capital. Rallis’ plan is to increase its shareholding in Metahelix to 100% over a period of five years.

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According to Rallis, the deal valuation works out to two times Metahelix’s projected revenue of next year, which according to analysts is an attractive deal. The firm has been valued at 186 crore, which means revenue next year is expected to be around 93 crore. Based on the current year’s revenue, the deal has been valued at three times revenue. This looks expensive, but Rallis seems to be confident about Metahelix’s growth prospects. Over a period of five years, it expects Metahelix’s revenue to exceed 1,000 crore on a cumulative basis. In other words, revenue is expected to grow at a compound annual growth rate of around 40%. Besides, the company is expected to be EPS (earnings per share) accretive in FY12.

Metahelix provides Rallis a platform in the entire value chain, which includes breeding, production and marketing of seeds. On the other hand, Rallis’ strong distribution network would help Metahelix. According to Sageraj Bariya from Angel Broking Ltd, “Metahelix has a patent for a variant of Bt cotton, which it plans to launch in the next one year. This shows that the company has a good R&D base. However, one needs to watch out for the response to the product from farmers."

Investors took the news of the acquisition in their stride. On a day when the Sensex lost 2.3%, Rallis’ shares too fell by 2.7% to 1,283 on Thursday. Since the beginning of the fiscal, however, the stock has done well and sharply outperformed the BSE-500 index.

Analysts attribute this to the firm’s strong financial performance. For FY10, the consolidated net profit increased by 41% on a year-on-year basis to 101.5 crore and for the half year ended September, stand-alone net profit stood at about 74 crore, up 33% over the same period last year.

This may well continue, given Rallis’ strong product mix and distribution network. Besides, the commissioning of its Dahej facility in Gujarat is likely to help the performance in the near future.

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