>RALLIS INDIA LIMITED (SMC)

2Q FY 2010 results: Rallis India Ltd. (Rallis) 2Q FY 10 net sales were in line with our estimates, while profitability was above our estimates. The company reported robust growth in net sales despite deficient monsoons and decline in product prices. The company's net sales growth was driven by strong domestic volumes growth on account of realignment of product mix. However, decline in realizations coupled with poor demand internationally muted the margin growth.

Outlook and valuations: Despite a tough environment during 2Q FY 10, Rallis reported better-than-expected results on account of proactive management and focus on cost reduction. Looking ahead, the early October rains have been heavy in many areas in the country which has resulted in increase in reservoir levels in India. This is expected to benefit Rallis as it will result in higher sales of pesticides during rabi season. Hence, we have revised our FY 2010 net sales and profitability estimates upwards. Over the long-to-medium term, we expect Rallis' revenue growth to be driven by its International business and domestic volume growth. Margins are expected to improve given that Rallis continues to optimize its cost structure coupled with declining input costs. Rallis also has significant excess land bank. As a part of ongoing restructuring programme, the company may sell some of its non-core assets which may pose an upside risk upside to our target price estimate.

At the current market price of Rs. 975, the stock is currently trading at 10.2x FY 11E EPS of Rs. 95.18. We maintain our positive outlook on the stock and maintain a BUY. Using the discounted cash flow-based model, we derive a target price of Rs. 1,195.

Financial highlights:
■ Net sales grew 13.2% y-o-y in 2Q FY 10 on the back of strong domestic volumes growth. The company recorded increase in net sales despite deficient & erratic monsoon, low pest incidence and poor international demand. Timely and proactive realignment of product portfolio drove its domestic volume growth. Pre-monsoon (March-May 2009) rains were deficient by 29%, and hence kharif acreage was lower by 6-7%. Export business was a drag during 2Q FY 10 as realizations declined on the back of high inventory levels internationally.

■ EBITDA margins declined 174 bps y-o-y mainly due to decline in realizations in domestic as well as international markets.

■ PAT (excluding extra-ordinary items) declined 2.0% y-o-y.

Key updates:
■ The company redeemed preference share capital of Rs. 880 mn during 2Q FY 10. Rallis aims to raise approximately Rs. 900 mn via share sale to upto 98 mn on a preferential basis to Tata Chemicals Limited.

■ The company has launched a fungicide ERGON, which not only protects the crop but also enhances the yield. The company will have three years of exclusivity for ERGON as it has registered it earlier than others in India. The company expects significant contribution from ERGON over the medium term.

■ The company expects Dahej plant to be operational from June 2010. The company continues to target Rs. 5,000 mn of net sales from this plant over the next three years.

■ The company has appointed a professional who is working on a long-term business development plans for Rallis.

Valuation: At the current market price of Rs. 975, the stock is currently trading at 10.3x FY 11E EPS of Rs. 95.18. Using the DCF valuation method, our revised target price is Rs. 1,195 per share for the Rallis common stock.

To see the full report: RALLIS INDIA