Shift in product mix hurts Rallis’ margins

Shift in product mix hurts Rallis’ margins

Rallis India Ltd’s stock fell after the company announced its fourth quarter financials, which disappointed the Street on profit margins. Rallis, a Tata Group company, is engaged in the business of pesticides, seeds, herbicides and plant growth nutrients.

The company’s stand-alone operating profit margin for the quarter ended March fell by 340 basis points to 15.1% from 18.5% in the same period last year. One basis point is one-hundredth of a percentage point.

That has also pulled down the margin for the full year. Operating margin fell by 1 percentage point to 18.4% and the same for the nine months ended December fell by around 50 basis points to 19.2%.

But why did operating margin fall in the March quarter despite a 14% year-on-year growth in the total operating revenue to Rs232 crore?

The reason was a shift in the product mix of the company towards lower-margin products. Unseasonal rainfall in south India adversely affected the rice crop, which led to lower offtake in the high-margin products.

Moreover, there was less pest occurrence in vegetables in eastern India, which also adversely affected Rallis’ sales.

The company’s raw material costs, too, were up. As a percentage of total operating revenue, total raw material costs increased to 58.6% from 51.7% in the same period last year. Rallis’ net profit fell by 13% to Rs19 crore.

Revenue for the full year increased by 20% to Rs1,074 crore and net profit by 25% to Rs126 crore.

“Going forward, we believe the continued focus on top line (revenue), shift in product mix towards herbicides and rising raw material prices could pose a downside risk to margins," wrote analysts from Emkay Global Financial Services Ltd in their post-results note.

Having said that, the company is expected to take price hikes in the current fiscal, which should help mitigate the impact of higher costs to some extent.

Investors are likely to keep a close tab on how the profit margins behave in coming quarters. A strong distribution network and strong product portfolio remain the key positives for the Rallis’ stock and it has commanded a premium to its peers.

Interestingly, the stock has already recovered the losses it made after the announcement of the results.

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