Rallis India: Margin Pressure to continue

Rallis India, a Tata Group company Group Co., has a history of over 150 years. The company is into the manufacturing of Agrochemicals and is present across the value chain of agriculture inputs - from seeds to organic plant growth nutrients.

On 21st April Rallis India announced its 4th quarter results for FY22. Rallis India (Rallis) 4QFY22 result was lower than our as well as consensus estimate.

Key highlights are:

- The  domestic revenue grew by 25% YoY

- The export revenue declined 7% YoY and  the revenue of Rs.150 million deferred to 1QFY23 

- The seed revenue was flattish QoQ 

- The company reported an EBITDA loss as was affected by one-off items

- Metribuzin plant is expected to run at full capacity from 3QFY23 onwards 

- The company launched 7 products in the CP business during FY22, aims to launch two 9(3) products per annum in future 

- Rallis bagged two small-sized contracts in CRAMS and 8) demand recovery for product PEKK is likely to take time. Rallis guided to spend Rs.2.5 billion Capex for FY23.

Rallis's gross margin contracted 660bps YoY to 34.8% despite the price hikes on account of a sharp uptick in input (RM, solvent, and freight) costs. 

The margin was severely impacted on account of:

- one-time provision has taken of Rs. 70 million for slow-moving inventory in seeds 

- international business opportunity loss of  Rs. 100 million

- reduction in the top-line contribution of the seed segment by 3% which impacted margins by ~50bps 

- a substantial increase in raw material prices, solvent prices, and input cost, which the company was unable to pass on fully. 

Rallis reported a loss of Rs.142 million at the PAT level vs. a profit of Rs.81 million in the corresponding period of last year.

Rallis has guided for Rs.2.5 billion of Capex in FY23. The commercial production has started in the formulation plant at Dahej and is expected to have higher capacity utilization from 2HFY23 onwards. The demand for Metribuzin is expected to revive in FY23 and the plant is expected to run at full capacity utilization by 3QFY23 as the excess inventory issue in the US has started to unwind and the company has started receiving orders for the same. At its multi-purpose plant in Dahej, Rallis will manufacture Difenoconazole, for which the registration process has been commenced and volume growth is expected to kick in 2 years. Additionally, the company has plans to start manufacturing one key raw material in-house 3QFY23 onwards.

Other Key Takeaways:

- Reducing dependence on China: During the quarter, the company faced an extreme shortage of the key raw material for Pendimathelin, due to COVID-19 led shutdown and logistical issues in China. Currently, Rallis procures 50% of its raw material requirement from China and in its attempt to reduce its dependence, the company has got into a long-term contract for a key raw material and raw material for 2 small products, with a local player in India. This is expected to aid the company in securing its raw material requirement seamlessly and de-risking from China.  

- Domestic Business: The domestic business grew by 25% during the quarter despite a soft Rabi season, led by price hikes and volume growth. The company plans on focusing on underserved markets like Madhya Pradesh, Uttar Pradesh, and Rajasthan through new product launches. During the quarter, the herbicide segment grew by 20%, while the insecticide and fungicide segments grew by 5% each.  

- International Business: For its export business, the company is focusing on increasing its formulation share. From the current revenue contribution of 35%, the company plans to increase its revenue contribution of the international business to 40% by FY25E.  

- Seeds Business: The company has launched new products in cotton, paddy, and maize. The seeds business has remained impacted in FY22 as well, largely due to illegal cotton crops. The contribution of illegal crops was 20-25% in FY21 and is expected to increase in FY23, which will continue to impact the seed business of the company. Currently, the company has fairly high inventory levels due to sales return during FY22 and will continue to focus on liquidating the same.  

- CRAMS Business: The CRAMS segment has largely been benign during FY22. The company bagged 2 new small contracts during the quarter. With regards to PEKK, the demand is expected to remain subdued in the near term. 

- Product-wise update: Demand for Metribuzin is expected to improve as the high inventory level issue in the US has started to unwind. The company completed the year with record production of Pendimethalin, Hexaconazole, Metalaxyl, Acetamiprid, and Lambda Cyhalothrin. For its acetate formulation, the company received registration in Brazil.  

The company expects 1QFY23 margins to remain subdued due to elevated RM prices and input costs. Nevertheless, the high crop prices, the expectation of a normal monsoon, and China + 1 is expected to result in a strong Kharif season, as well as boost exports for the domestic players.