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Rallis India spurted 6.4 per cent on Friday on the back of brokerage upgrades on the premise that the company's revenues would be driven by high growth segments such as seeds and nutrients. A large part of the robust outlook is due to the company's seeds subsidiary Metahelix. The seeds business is the fastest growing segment with a significant room for margin expansion, believe analysts. While the business contributed Rs 300 crore in FY15, registering a growth of 38 per cent year-on-year, it contributes a sixth to the company's overall revenues.
Metahelix, which has a strong market position in key crops such as rice, corn and bajra, lags peers such as Kaveri Seeds given heavy investments. While Kaveri's Ebitda margins are 22 per cent, Metahelix trails behind at eight per cent. Given that the capex cycle over the past few years when the company invested heavily in employees, advertising and promotional activities is behind it, analysts expect operating leverage to kick in. Analysts at IIFL believe FY16 could be an important year for Rallis when key growth drivers such as Metahelix and its potential for margin expansion starts to happen. From a turnover of Rs 300 crore, the business is expected to grow 30 per cent annually between FY15 and FY17 to gross Rs 530 crore by FY17.
The contract research and manufacturing services (CRAMs) segment, too, is expected to boost the company's revenues as its facility at Dahej ramps up. Analysts at Prabhudas Lilladher say shift in manufacturing base from China and Japan will benefit Indian CRAMs players such as Rallis. The company will be able to tap into the drugs, which are coming off-patent over the next three years, with the value of the same pegged at $5 billion. If the company is able to get orders such as the past Rs 400 crore order from Cytec Engineering of the US, it will boost revenues. Analysts estimate a single molecule contract from a multinational company could add an incremental $100 million to the turnover annually.
The plant growth nutrients business, which grew at 37 per cent year-on-year to Rs 75 crore, is currently a small part of the overall revenues but is expected to grow at about 25 per cent over the next few years.
Diversification away from the domestic pesticide portfolio to segments such as seeds, plant growth nutrients and exports has helped the company grow at a faster rate over the last three years. Analysts expect the company to grow its net profits by 20 per cent with margins at 16 per cent over the next two years. Sales of domestic agrochemicals segment, which accounts for 55 per cent of consolidated sales, have been flat in FY15 and growth over the past few years have been erratic at 2-15 per cent. IIFL analysts say domestic agri formulation business has been lacklustre over the past few years, but could potentially accelerate if new product launches gain traction.
At the current price, the stock is trading at 20 times its FY17 estimates. Given the recent upgrades and price target of Rs 265-290, there is an upside of 10-20 per cent. Any weakness in the stock is a good opportunity to add to your portfolio.
