Q2FY24 Review: Rallis India: Outperformance led by Seeds business

27 Oct 2023 , 01:08 AM

Despite revenue decline of 12.5% YoY, earnings beat estimates as gross margin expanded, led by better product mix and cost optimisation. Revenue of the domestic Crop Care business declined 5% with positive volume growth, while exports declined 50%; on the back of 38-40% volume decline due to ongoing de-stocking and price drop. Global Agchem demand remains soft, on the back of inventory overhang and lower prices, and revival is not in sight yet. Analysts of IIFL Capital Services cut FY24-25 EPS by 4% to factor the weakness in exports and roll forward their TP to Dec’24 (from Sep’24). Their 1YF 18x Dec-25 P/E-based TP remains unchanged at Rs220. 

Outperformance by Seeds business: 

Sales declined 12.5% YoY, due to weak exports, falling prices and erratic rainfall in the domestic market. International Crop Protection business’ revenue fell 50%, due to ongoing global destocking. Gross margins expanded by 460bps to 39%, owing to better product mix and cost optimisation strategies. Seeds business grew 3.4x to Rs950mn, albeit on a lower base; due to good liquidation and low sales return. Management emphasised on liquidating the inventory, which effectively prevented the need for substantial inventory markdowns during Q2. Seeds Ebitda was Rs60mn as against the loss of Rs210mn in Q2’23.

Resilient performance by domestic Crop Protection: 

Though domestic Agrochemicals market faced challenges due to erratic monsoon and El Nino conditions leading to long dry spells that impacted consumption patterns — Rallis was able to hold on to its volumes in Q2. However, management has cautioned that lower reservoir levels at the end of Sept’23 pose risks to demand during the ensuing Rabi season. 

Near-term remains challenging: 

The outlook for the ensuing Rabi season is not encouraging, given lower reservoir levels. Thus, domestic Crop Protection will continue to face challenges. Likewise, in exports, excess inventory across customers will result in weaker sales over the next couple of quarters. However, the company’s efforts to minimise the impact through shorter purchasing cycle and effective liquidation strategies are yielding results. Further, the much-awaited MPP has been commissioned and capacity utilisation is expected to get ramped up gradually during FY25, provided the approvals are received on time.