Emkay Global Financial has given Hold recommendation for Rallis India with a target price of Rs. 275 in its research report issued on Apr 23, 2022
Emkay Global Financial’s report on Rallis India
Rallis posted overall revenue growth of 7.7% YoY in Q4, largely driven by pricing growth. The crop care business grew by 8.2% YoY, driven by strong performance in domestic crop care (up 25.1% YoY), which was offset by a 7.6% YoY drop in international crop care. Domestic crop care growth was driven equally by pricing and volume growth, while the international business was hit by sales loss due to an extreme shortage of a key RM and the phase-out of an order from a customer (revenue impact of ~Rs500mn). The robust performance in domestic crop care was driven by calibrated price hikes and volume growth. However, significant RM cost inflation, higher freight/logistics costs, shortage of a key RM, inventory write-down, and poor performance of the international segment led to a significant margin contraction in Q4, leading to an EBITDA loss of Rs28mn. This further trickled down to the bottom-line with a loss of Rs142mn in Q4. Management indicated that the headwinds are expected to continue in Q1 and that it would focus on driving volume and mix-led growth while taking judicious price increases to offset RM volatility. RM inflation is expected to lead to higher top-line growth; however, volumes are expected to be under pressure due to high costs. We have lowered our EBITDA/PAT estimates amid inflationary RM trends and cost pressures.
We cut FY23/FY24 EPS estimates by 11.7%/11.6%, considering RM/cost inflation. Although we believe ongoing investments will drive revenue growth, margin pressure is expected to continue in the short-to-medium term. We maintain a Hold rating with a Mar’23E TP of Rs275, based on DCF. Key DCF assumptions: 1) 11.0% CoE, 2) 10% PAT CAGR in FY25E-FY35E, and 3) terminal growth rate of 6% post FY35E.