Rallis shares rally as Tata Chem picks up additional stake, but prospects bleak

In Q1, Rallis saw a 13% year-on-year (YoY) fall in revenue in its crop care segment, attributable to lower volume in the exports business, (Photo: Mint)
In Q1, Rallis saw a 13% year-on-year (YoY) fall in revenue in its crop care segment, attributable to lower volume in the exports business, (Photo: Mint)

Summary

  • Rallis shares have dropped nearly 9% in 2023 so far. Analysts have highlighted ongoing structural issues, including a genericized product portfolio and heavy reliance on China for raw materials.

Shares of Rallis India Ltd. soared 4% on the National Stock Exchange in early deals on Tuesday, a response to Tata Chemicals Ltd.'s recent acquisition of an additional 4.99% stake, taking its shareholding in the agrochemical company to 55.04%.

But that is where the good news ends. The company's June quarter (Q1FY24) results left much to be desired, and the near-term outlook appears equally bleak. In the Q1 earnings call, Rallis acknowledged the lack of anticipated pricing growth, relying instead on volume to drive future growth. Furthermore, the company has adopted a conservative approach towards its export market, forecasting a gradual recovery in H2 FY24 once the pressure on channel inventories eases.

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In Q1, Rallis saw a 13% year-on-year (YoY) fall in revenue in its crop care segment, attributable to lower volume in the exports business. Overall revenue fell more than 9% to 782 crore. Still, Ebitda (earnings before interest, tax, depreciation, and amortization) drop was limited to 2.7%, due to a favourable product mix and cost control measures, marginally improving the Q1 Ebitda margin by 97 basis points to 14%.

Going ahead, “On the margin front, falling input costs are unlikely to boost margins as customers demand reductions in finished product prices amid what is currently a buyer’s market given oversupply out of China. Price declines could well continue to weigh on margins in coming quarters," said analysts at Kotak Institutional Equities in a report on 17 July.

Rallis, meanwhile, has projected a capital expenditure of 1,500 crore in FY24 and expects 60% capacity utilization at its multi-purpose plant (MPP) in Dahej. 

“Commissioning of capex shall drive backward integration, and MPP and couple of new products along with ramp-up of the CRAMS business shall support revenue growth. Even so, Rallis’ margin profile and return ratios shall continue to suffer," said analysts at Nuvama Research in a report on 17 July. CRAMS is short for contract research and manufacturing services.

As things stand, Rallis shares have dropped nearly 9% in 2023 so far. Kotak analysts have highlighted ongoing structural issues, including a genericized product portfolio and heavy reliance on China for raw materials. 

“While management is making efforts to address both these challenges, any significant positive results may take years to become visible. In this backdrop, valuations are still not attractive enough to warrant a positive stance, in our view," said the Kotak report.

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