Rallis India investors brace for muted Q2 earnings performance

The stock of Rallis India Ltd declined nearly 4% on the NSE in Monday's early trading session. In comparison, sector index Nifty 500 fell 2.5%.

Investors in this stock need to gear up for the company's subdued earnings performance in Q2FY23. In its latest business update, the company's management indicated that the September quarter was a difficult one for the Indian crop protection market. So, the company expects its domestic crop care and seeds business to post weak results this time. Tepid demand due to disproportionate rainfall has led to lower pest infestation and miss in pesticides spray, the management said. Delayed monsoon in some parts of the country has led to lower paddy acreages, thus weighing on its seeds business, the management added.

In this gloom, its export business is a bright spot and is relatively better placed than the domestic segment, aided by a lower base of last year. The company has increased its focus on branded formulation segments in southeast Asia and the African region. Also, it has seen new customer additions in the US and Africa, the management added. 

Analysts at Antique Stock Broking Ltd note that the company is on track to increase export contribution to total sales from 30% in FY22 to 40% by FY26. "During 2QFY23, we expect revenue growth of 16% YoY driven by 40% and 8% YoY growth in export and domestic business, respectively," said the domestic brokerage house in a report on 26 September.

That said, the company's management is watchful of the drought situation in US and European markets.

Analysts are also cautious. "Rallis began the quarter with high-cost inventories of raw materials, and while these have largely been liquidated by now, they will have impacted the quarter’s margins," said analysts at Kotak Institutional Equities. Note that the company did take price increases during the kharif season to protect margins and has also tried to better its product mix. "Cash flows will also be under pressure due to trade stocking as well as inventory build-up. "We now estimate 13% revenue growth for 2Q, accompanied by flat margins; FY2023E EPS is cut by 6% to Rs8.9," added the Kotak report dated 26 September. EPS is short for earnings per share.

Concurring, analysts at Prabhudas Lilladher have reduced their EPS estimates for the company by 5.5% and 4.9% for FY23/24 on near term margin pressures due to high-cost raw material inventory in 2Q23 despite a 4-5% price hike in June 2022.