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Rallis India's turnaround has been noticed by the markets, leading to interest of institutional and individual investors like Rakesh Jhunjhunwala in the recent past. On the occasion of its results for the September quarter, Jitendra Kumar Gupta spoke to V Shankar, managing director & CEO of Rallis India to find out key growth drivers and impact of good monsoon on financials.
You have been entering into new segments, international markets, enhancing existing products and acquiring companies to enter into high growth areas. But don't you think you are late considering the competition has moved in this direction much earlier?
If you look at the history of the company, Rallis has always been an iconic company and a leader in its core business. But in 2003-04, Rallis had a huge loss or worst ever loss of about Rs 107 crore, which virtually wiped out the company. It took us five years to turnaround operations and bring it on track. We did this by focusing only on the core business that is crop protection. Later on, we started building leadership in the core business. In 2007, we announced that we have now earned the right to grow. Then we looked into new opportunities like seeds business. We knew that it could takes another 15 years to build our own seeds business, which is why we went for acquisition. You are right that we have taken time but that is not without reason. Then, we built enough resources to invest. Recently, we invested in Dahej facility in Gujarat, which is meant for contract manufacturing.
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We were the pioneers 20 years back but we never did investments. People forgot us. Now after 20 years, we have again set up a factory and are making our presence felt in the industry. Yes we lost out, but now we are taking sure and steady steps. We have presence across sectors and have entered into contract manufacturing. So it has taken us some time but now we have put in all the building blocks in place. As we scale up you will see the benefits of some of these initatives being reflected.
How will the initiatives benefit the company? What are the opportunities in contract manufacturing?
If you are operating in one segment and only operating in India, you are going to get hit because of poor monsoon. So to some extent we are trying to eliminate the cyclicality of the business while diversifying into new markets and segments. International markets give me chance to operate in other quarters and not just July and November as in India.
Also we are very strong in manufacturing, so contract manufacturing for the global companies gives me balance and higher growth. Core business grows at about 8-10%, seed business grows at about 12-15%. Segments like contract manufacturing gives us an opportunity because India is emerging as an alternative to China. We may not substitute China, but people never used to consider India, but now we are getting some contract manufacturing work. Almost 80-90% of contract manufacturing happens in China. Even if we can attract a small proportion of that it will give us good opportunities. Global companies are already increasing sourcing out of India. This is also a reason why we have invested in the Dahej facility in Gujarat. We are expecting about Rs 500 crore of business over five years coming from this facility.
What do you want to do with the smaller acquisitions like Zero Waste Agro? Are they scalable?
The soil needs organic carbon, which keeps the soil healthy. The products we have come out with are the waste from sugar mills and distilleries. We use specialized technology, which cures the soil and restores the carbon health of the soil. In same way it is organic fertiliser or soil conditioner. You may be shocked but for us the opportunity lies in that 100% of India's soil is sick. So in theory 100% of India's soil requires the product. Currently, farmers use cow dung and other traditional methods like farm yard manure, but increasingly that is also not available. In the case of seed manufacturer Metahelix Life Sciences, which we acquired two year ago, the numbers are very promising. We have already grown 80% in the first half. Last year, the company did a turnover of about Rs 120 crore, this year we have already done turnover of about Rs 170 crore plus.
Can you crack some of the segments you have entered where competitors have huge experience and research capability?
Metahelix Life Sciences is an excellent example. It is run by very professional people and scientists. The company has 10 years experience and good pipeline of products. So on that count we have a well established and experienced team of people and product pipeline to deal with the competition. We have earlier said that over the three year period, about 40% of our revenues could come from these initiatives. Last year, we derived about 25% and this year though the numbers are still not out but we are hopeful of achieving about 30%.
Are you again entering into an investment phase?
We definitely need the next dose of investment. We have invested about Rs 400 crore in the last three years. As we go ahead, over the next two to three years you should see scaling up of these investments.
As you move away from the core business, you will have to acquire companies given that it is difficult to build a business, which requires lot of time in terms of research. What do you think?
It is true, and this has led us to acquire companies in the past. Our thinking is on the similar lines. We are always on the look out for companies to acquire. However, it is not easy to find a suitable company which can have cultural and strategic fit.
Coming to quarterly results, could you tell us what led to strong growth in revenues and profits in September quarter?
From the first quarter onwards the early onset of the monsoon was very good, sentiments were quite good and the cropping started quite early. On the top of that, the minimum support price has been increased, which is always a positive indicator. Only dampener we had was the sliding rupee. When we entered the second quarter things were looking good. After almost two years of bad monsoon, good monsoons this year was god given and we needed it.
But on the flip side, as we entered the second quarter rainfall continued, which is not good for agriculture. It was so unpredictable, that by September it should have dried up, but we continued to see huge floods in different part of the country, which disrupted production. Raw material prices were going up, there was disruption of supplies from China and on top of that there were huge expectations in the market as a result of good monsoon. In the end, the underlying crops have come up. Across crops the status is good. What we have seen in this quarter is that the business is driven by the higher volumes growth and not so much because of the prices.
How did you manage to grow margins despite cost pressures and rupee depreciation?
We have improved margins by about 60 basis points. What we have done is lot of work on the field. We did not succumb to price pressure and did not cut prices. Because of the brand building, we have been able to selectively raise prices to deal with the cost pressure. We did not allow the margins to come down. Other thing that we did was to have very tight control on the working capital. We have managed our inventories and the credits efficiently. This is also reflected in the interest cost, which has fallen from Rs 8 crore to 5 crore in the September quarter.
Do you think the benefits of the good monsoon could spill over to next few quarters?
Compared to last year we have had a much better year. Second quarter is good one, but whether this will replicate or not in the coming moths is hard to say. Because of the good monsoon, the underlying sentiments are very good, the farming activity is happening at good pace. Reservoir levels which had reached to alarming levels have come up and MSPs have been raised in the recent past. So all in all there is a reason to be optimistic for the remaining months of the year. And one more important thing is that the soil moisture has improved, which is good for farming. It is difficult to predict the nature, but I can say for sure at this point in time that things are looking positive in terms of underlying sentiments.
