Tuesday, May 1, 2012

> Metahelix performance improves after Rallis’ acquisition

Key Points-
  Adverse domestic conditions in Q4FY12 were responsible for Rallis’s subdued performance: Domestic agrochemical industry remained under pressure in Q4FY12 with industry witnessing flat to negative volume growth due to erratic rainfall, low crop productivity, poor crop economies and reduced acreages for some crops. Andhra Pradesh, Karnataka, Maharashtra & West Bengal were impacted due to erratic rainfall while crop holiday in rice deltas of Andhra Pradesh led to reduced consumption of agrochemicals domestically. Shift in farmers’ preference towards lower priced products also impacted agrochemical sales. High inventory coupled with lower demand further exerted pressure on margins.

  Innovation turnover index dropped to 11.4% in FY12: Rallis’ innovation turnover index (revenue contribution from newly launched products) dropped to 11.4% during FY12 compared to 20% during FY11. Decline is mainly attributed to low pest pressure in paddy & cotton, poor yield in pulses, low price realization of farm produce for farmers which resulted into reduced usage of Rallis’ branded & premium priced molecules. During FY12, Applaud & Takumi were also removed from the innovation turnover index as these products are now more than 4 years old. However with slew of new products in pipeline, management is confident of achieving an index of 20% in FY13.

  Metahelix performance improves after Rallis’ acquisition- Metahelix contributed Rs 810mn to revenues while net profit stood at Rs 6mn for FY12 compared to Rs 424mn of sales & loss of Rs 143mn in FY11. Rallis’ strong distribution network combined with aggressive marketing strategies has helped Metahelix performance to improve over the last year.

  Stringent focus on collecting receivables led to working capital improvement- Management’s conscious decision to focus on collection of receivables has led to working capital improvement during the quarter. Consequently, debtors reduced to Rs1bn by FY12 from Rs 2bn in H1FY12.

 Domestic agrochemical industry growth impacted due to pressure on farm incomes: During Q4FY12, domestic agrochemical industry witnessed flat to slightly negative growth due to pressure on volumes. Shrinking farm profitability due to declining farm incomes led to reduced usage of agrochemicals domestically impacting volumes. Shift in farmers preference towards lower priced molecules also impacted agrochemical sales. Pricing pressure also remained during Q4FY12 exerting further pressure on margins

 Exports fared better than domestic market in the current scenario: Exports markets have fared better than domestic markets as domestic market continues to reel under pressure of declining farm incomes. Int’l business has scaled up over the last couple of years and Rallis’ s exports now contribute 1/3rd of the total revenues.

■ Near term performance likely to remain muted- Unfavorable climatic conditions & pressure on domestic farmers’ profitability is likely to put pressure on agri-input consumption in near future. Though long term fundamentals remain intact, however near term profitability is likely to be under pressure.

 Long term strategy – Rallis’s long term strategy focuses on building & strengthening customer relationship activities, extension of MoPU (grow more pulses) initiative to Karnataka & Maharashtra, Dahej ramp up, introduction of new products which are currently in pipeline, increasing its portfolio of agri services, scale up the organic manure business.

■ Organic manure business a new avenue of growth- During the quarter, Rallis has entered into an agreement to acquire majority stake of 51% in Zero Waste Agro Organics Pvt Ltd (ZWAOPL), a Maharashtra based organic manure and soil conditioners manufacturing company. The acquisition is an all cash deal for Rs 290mn. Rallis will also have exclusive sales & marketing arrangements with ZWAOPL for domestic and int’l markets. Though management has built in conservative revenue estimate of Rs 1bn cumulative over 5 year period, however we believe this business has strong potential to exceed estimates. Margins from this business are also expected to be higher as compared to Rallis’s current product portfolio.

■ New product launches in seeds would scale up Metahelix revenues as well as lead to margin expansion- Management is hopeful that with new launches in the seeds business, Metahelix would scale up revenues in the coming year. Company is also likely to witness margin expansion due to benefits from operating leverage.

 Innovation turnover index to revert back to 20% in near future- Management expects Rallis innovation turnover index to revert back to 20% in near future with the launch of new products.

 Minimum Support Prices (MSPs) likely to be increased for certain crops which would ease pressure on farmers- Decline in market prices of certain crops like paddy & cotton below MSPs have wreaked havoc and farmers have incurred substantial losses on inventory. Government is likely to announce new MSPs for kharif season which is expected to be higher.

■ Though near term outlook remains muted, however long term future shines bright- Pressure on domestic farm incomes is likely to keep domestic agrochemical consumption under check for couple of quarters. However, we expect this short term phenomena to reverse if monsoons turn out to be normal this kharif season. Dahej ramp up, extension of MoPU, launch of new pesticides & seeds, scale up in organic manure, focus on agri services is likely to lead growth for the long term. We maintain HOLD with target price of Rs 120.