>RALLIS INDIA LIMITED: Rallis with the acquisition of seeds based research company, Metahelix (and its subsidiary, Dhaanya Seeds Ltd.)

■ New Dahej facility to spruce up international sales; reduce domestic market dependence
We expect Rallis India Ltd. (Rallis) international sales to get a boost due to commencement of operations at the company’s plant at Dahej catering mainly to Contract Research and Manufacturing Services (CRAMS). This would also reduce dependence of the company on domestic sales. We expect this plant to generate cumulative revenues of `5.5 bn over the next three years. Owing to the boost from this facility, we expect Rallis to register 22% CAGR growth in the pesticides business over FY12E – FY14E. However, PAT margin is expected to go down 110 bps to 10.7% in FY12E due to higher interest and depreciation cost of the plant. We expect Dahej plant to reach full capacity by mid FY13.


■ Metahelix acquisition to help company grab a bigger pie in the lucrative seeds market
Metahelix Life Sciences Ltd. (Metahelix), the research led seeds company recently acquired by Rallis is expected to clock revenues of `930 mn in FY12E. Management expects revenue from Metahelix to ramp up to `10 bn over the next five years. Currently, Metahelix is a loss making entity; however, we expect it to register a 35% CAGR growth in revenues over FY12E-FY14E. Metahelix produces Bt Cotton seeds in India which have a market size of `40 bn. Rallis expects Metahelix to occupy an 8%-10% market share in the Bt Cotton seeds market in India over the next three years, thereby leading to cumulative revenues of close to `4 bn. Seeds are a more profitable business than Rallis’ core business with margins close to 20%.


■ Consistent product launches and continued emphasis on R&D
Rallis has been consistently launching new products every year, maintaining a healthy rate of three launches per year. From FY06 to FY11, Rallis launched 19 products in all. In FY12, it has launched 13 products till date (9MFY12). The Innovation Turnover Index (revenues from products newly introduced in last four years to total turnover) has consistently been around 30% for Rallis. Rallis has one of the highest spends on R&D (almost 1% of sales) among its listed peers. We believe the rate of new product launches and proportion of R&D to further improve for Rallis with the acquisition of seeds based research company, Metahelix (and its subsidiary, Dhaanya Seeds Ltd.).


■ Numerous initiatives and customer engagement programs
Rallis has been continuously engaging with its customers via numerous programs such as Rallis Kisan Kutumb (farmer contact programme to understand farmer needs), More Pulses (increase yield and production of pulses), Rallis Poised (programme to drive sustained profitable growth), etc. The More Pulses (MoPu) initiative has caused yield to improve by up to 40% to 500 kg/acre from 300 kg/acre in Tamil Nadu which increased farmer income by `5,000 per acre. The Rallis Poised initiative has enabled company to deliver a CAGR of 15% in revenues and 26% in PAT over FY07 – FY11. Due to various customer engagement programmes, Rallis’ products have a high brand recall in the Indian crop protection market with seven of its products in the top 12 products by customer recall.


■ Valuation
At CMP of `123, Rallis is trading at 17x its FY12E EPS and 12x its FY13E EPS, which is close to its average historical one year forward P/E. As compared to its listed domestic peers, Rallis commands a rich premium of close to 30%. We expect Rallis to continue to command premium due to a) its consistent product launches, b) ramp up in capacity at Dahej facility, and c) improvement in performance of Metahelix. We initiate coverage on the stock with a BUY rating and a target price of `153 per share based on a P/E of 15x FY13E EPS of `10.20, implying a potential upside of 25%.
RISH TRADER