Rallis India: Rising input cost dents margins, diversification key

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26 Aug, 2025 12:21

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Rallis India, a Tata group entity, reported a weak Q4 FY18 performance on the back of a challenging Rabi season. Earnings before interest tax and depreciation (EBITDA) margins contracted almost 320 basis points (bps). While revenues grew moderately at 6.3 percent year-on-year (YoY) on the back of volume growth, the same did not percolate to profits, with operating profits narrowing 20 percent YoY and profit after tax dipping 21 percent YoY. Sequentially, performance remained weak both in terms of revenue growth and profitability.

Increased supply concerns from China led to a price uptick for core raw materials resulting in a substantial cost increase. Given the weak Rabi season and high competition, the management had little pricing power and was unable to raise prices. This resulted in a margin contraction. Factors like: 1) Down trading (switching to a cheaper alternative) by farmers due to a weak season; 2) Increase in employee costs on account of new recruitments for contract research; 3) Uptick in interest expenses and other expenses; and 4) One-time forex loss further contributed to the margin shrinkage.

There was a substantial surge in working capital due to pile up of inventory and higher debtors. The company had strategically stocked up inventory in light of increasing raw material costs, the benefits of which would be visible in H1 FY19. Working capital was also impacted due to an unfavourable product mix, with higher value products being piled up in stock. This would be offloaded in H1 and would help cushion margins.

Metahelix Life Sciences (seeds business), whose portfolio is largely focused on Kharif crops, reported a YoY revenue growth of 4.2 percent in Q4 FY18. The company now has a healthy line up of new seed product launches which would focus on Rabi crops. The management said it plans to expand its seeds business internationally. This would help Rallis diversify and reduce risks.

The quarter gone by marked the commissioning of the Dahej facility which focusses on custom synthesis (CSM) for the pharmaceutical space, something which the management wants to aggressively expand into. This segment is expected to contribute around Rs 50 crore in FY19 and might prove to be future growth driver.

New product launches in the second half have received a positive response from farmers. The management plans to focus aggressively on its farmer outreach programme and develop farm products based on the use of artificial intelligence techniques. The company has a decent product line up which would be its key growth driver going forward.

Owing to contraction in Chinese supplies, the management is exploring opportunities for venture into manufacturing of raw materials that were hitherto sourced from China (nearly 40 percent of total input). This would help in backward integration, protect margins and ensure a smooth supply. The company could also capture the vacuum caused by the supply disruptions from China and may be a factor to watch out for in the longer run.

The Indian Meteorological Department and Skymet have both forecasted a normal monsoon, which would benefit the company in the upcoming Kharif season. Commercialisation of new molecule for exports will drive growth in FY19. However, the company has little pricing power and high input costs may continue to be an overhang on profit growth, though there might be some benefit from its piled up inventory.

The stock has corrected almost eight percent in the last 12 months and is trading almost 23 percent below its 52 week high. It is now trading at FY19e P/E of 19 times and an EV/EBITDA of 12 times. The company’s external operating environment has been weighing on its performance, the overhang of which would continue in the near-term.

We anticipate some margin relief in H1 FY19 on implementation of the government’s agri focused policies and expectation of a robust Kharif output. The management is looking to foray into a more profitable product mix, which would augur well margins in the longer term. Commercialisation of new molecules is also something to look out for.

We recommend a gradually accumulation as the stock is positioned to benefit from the strategic initiatives at the Tata Group.

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